Japan’s Abe Tries Painful Structural Reform

In his 29 April speech to US Congress, Japanese Prime Minister Shinzo Abe proudly referred to his administration’s “sweeping reforms to our agricultural cooperatives that have not changed in 60 long years.”

Those reforms ae a part of Abe’s crucial “third arrow” of structural reform, which has been stalled since he took office. But the draft bill presented to the Diet on April 3 to reform the Japan agricultural cooperative (JA) organization is a very much watered-down version of initial recommendations for reform. The centerpiece of the reforms, which survived tense negotiations between the government and the ruling coalition, was reform of the leadership organization of the agricultural cooperatives — JA-Zenchu.

The reforms focused on JA-Zenchu’s power to audit and provide guidance to local agricultural cooperatives. JA-Zenchu’s National Audit Body conducts both accounting audits and operational audits that check whether the cooperatives are operating in accordance with agricultural cooperative principles. If JA-Zenchu’s auditors consider anything to be problematic they can provide guidance aimed at making improvements to the co-ops’ business operations.

After the reforms take effect, JA-Zenchu will become a general incorporated association and its power to audit and provide guidance to local co-ops will be abolished. It will separate off its National Audit Body, which will become an independent auditing corporation based on the Certified Public Accountants Law. Co-ops can choose between this new auditing corporation and general auditing corporations. Either way, the co-ops must be audited by certified public accountants as opposed to auditors who have qualifications specified by a Ministry of Agriculture, Forestry and Fisheries ordinance.

The reform is more significant than it first appears.

As Mutsuo Masuda, former Deputy Chairman of the Board of JA’s Norinchukin Bank explains, through its guidance, JA-Zenchu has been applying the long-held principle of “full use” (zen riy), which encompasses the idea that members should use the co-ops when buying and selling goods.

This principle helped to unite members back when there were more than 10,000 local co-ops (their number now stands at around 700). The official line is that a higher rate of JA use and transaction volume will produce benefits in the marketing of agricultural products. This might have been true when there was a food shortage, but now it only benefits the JA organisation. Still, JA-Zenchu “tacitly demands ‘full use’ as part of its guidance of local co-ops”.

Abolishing JA-Zenchu’s auditing and guidance functions will give farmers and local co-ops greater freedom to develop their own marketing channels without necessarily going through the prefectural economic federations and national marketing federation (Zen-Noh). As Masuda argues, if they can develop buyers and change the distribution system, they should be able to reduce costs, which will improve productivity. The new ban on forcing members to use co-op businesses will also contribute to promoting competition.

In addition, Masuda points out that there are limits to how well an organization can audit itself. JA-Zenchu’s auditing of local co-ops currently permits them to use a slipshod accounting system called “members accounting” (kumiaiin kanjo) whereby members can put purchases on their tab. If they can pay off the debt when they sell their agricultural products all is well, but if they cannot the payment due becomes a loan. And if this cannot be paid off, it becomes a bad debt.

Co-ops have kept the system going because abolishing it would make it difficult to sell goods to members. It has ended up as a vicious circle for both farmers and the the co-ops. Subjecting co-ops to auditing by certified public accountants would likely put an end to this practice.

Reducing JA-Zenchu’s authority also undermines its leadership of the entire agricultural cooperative system. JA-Zenchu’s audits, which have binding power, are the basis of its leadership of the JA Group. It obtains around ¥8 billion (US$66.5 million) per year in levies (fukakin) from the local co-ops and JA federations on the pretext of auditing fees.

JA-Zenchu has used this stable source of revenue for political purposes, such as paying personnel expenses for political campaigns, buying tickets to politicians’ parties and hosting large-scale events in Tokyo. It is “the source of its power.” As voluntary members of JA–Zenchu — a general incorporated association — local co-ops and JA federations will not be forced to pay compulsory levies. They may make voluntary contributions but these will not raise enough money.

Cutting into JA-Zenchu in this way is also symbolically important. Within the JA Group, the central unions have always been at the top of the organizational pecking order, with JA-Zenchu at the very peak. Its chairman has been the one who does the talking in negotiations with the government, and with ruling party Diet members. JA-Zenchu therefore embodies the political power of the JA Group.

JA-Zenchu’s staff members regularly attend LDP policy meetings. When party members make comments that are not in line with JA’s standpoint, staff members contact the agricultural cooperative in the Diet member’s hometown and request that they be amended. Diet members listen to the co-ops in their hometown because they are worried about their seats. This system has been in place for many years but is now under threat.

The government’s reforms will drag JA-Zenchu from the top of the organizational pyramid and undermine its political as well as its economic power. This opens up the potential for greater reform across the spectrum of agricultural policy.

Aurelia George Mulgan is Professor at the University of New South Wales, Australian Defence Force Academy, Canberra. This was written for the East Asia Forum, a platform for analysis and research on politics, economics, business, law, security, international relations and society centered on the Asia Pacific region. It is based out of the Crawford School of Public Policy at the Australian National University.