The Scope for Increasing Biofuel Crop Production in Japan: An Analysis of Alternative Policies

In 2010, concerns regarding Japan’s excessive dependence on imports for food and energy caused the Japanese government to introduce subsidies to stimulate biofuel crop production. In this paper, we study the viability of price subsidies and certain other policies with respect to increasing the production of biofuel crops. First, we estimate the elasticity of the supply of Japanese agriculture with respect to price (inclusive of the subsidy for each unit of production). For this purpose, we use a longitudinal database of 1822 municipalities that covers all 47 prefectures of Japan. This database includes information about the production of 116 crops and their respective revenues, including subsidies. Using panel data regression techniques, we determine that although the long-run supply of certain crops is highly elastic, this supply is highly inelastic if the production of other crops is held constant. Therefore, an increase in the demand for biofuel crops will cause substantial price increases of agricultural products, largely crowding out the demand for food crops. We then discuss the viability of encouraging various agricultural practices, such as multiple cropping and the cultivation of recently abandoned land. Instead of using abandoned land, which produces a lower yield and requires abundant labor, we recommend a multiple cropping system that involves the rotation of rice and wheat. Although these measures will increase biofuel crop production to a certain extent in the short run, full-scale biofuel crop production can only take place after substantial reforms are implemented to increase the production capacity of the Japanese agricultural sector.