The Japanese beef market in a disequilibrium econometrics framework : implications for the U.S. - Japan beef market access agreement Public Deposited


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  • The success of the U.S. government in persuading Japan to liberalize the beef market is viewed as a relief to the U.S. beef industry. The economic benefit (to the U.S. beef producers!) of the trade liberalization however is yet to be seen. The size of this benefit is determined, among others, by (a) the net change in Japan's retail price due to the liberalization, (b) the price elasticity of demand for the U.S. beef in Japan, (c) the degree of price rise in the world market, and (d) the export capacity of the domestic sector. Availability of alternative beef sources and the degree of substitutability between the U.S. beef and those alternatives affect factor (b) and factor (d) depends on the extent to which beef and other meat products substitute each other in the domestic market both in production and consumption. Evaluation of the U.S. - Japan Beef Market Access Agreement (BMAA) therefore has become a high policy profile. In the interest of assessing possible policy effects of BMAA, several researchers have attempted to parameterize and quantify the Japanese demand for beef. The fact that this market is (a) semi-isolated from the rest of the world by restrictive import quota, (b) managed domestically by government parastatal, and (c) characterized by multi- and intensely differentiated beef with no parallel historical data has made the choice of economic theory and methodology difficult. While most researchers (Group 1) relied on conventional method [e.g. 55; 125], others (Group 2) [2] contend that managed import market may better be explained by a model of political nature. By assuming the usual competitive market behavior, Group 1 underestimates possible implications of existing market structure for building and estimating conventional econometric models. Group 2, on the other hand, limits itself to normative analysis. Due to the absence of consensus among researchers regarding implications of policy-relevant parameters, the desirability of the BMAA is still an unsettled policy issue. The general purpose of this study has been to generate some further information on Japan's beef market. In pursuant of this objective, an attempt is made to (a) show how significant the beef quality issue is in evaluating that market, (b) test the market equilibrium hypothesis, and (c) upon the acceptance of the alternative (disequilibrium) hypothesis, estimate the structural parameters from a model specified in the light of imperfections in the market. This fills the void in previous studies. Drawing on existing literature, the beef quality categories are shown to have been narrowing and, in fact, converging to the two middle categories, medium and common grades. It is suggested that future market studies may benefit from concentrating on these two grades in assessing competitiveness and substitutability with domestic beef. Understanding the nature of this convergence (i.e whether the shift is attributable to changes in cost or preference structure) may contribute to sound policy making. Based on (a) increased concentration in production and distribution sectors, (b) government intervention in beef and related markets, (c) high degree heterogeneity in beef, and (d) short-run supply inflexibility due to long fattening period and restrictive import policy, the Japanese beef market was hypothesized to have been in disequilibria due to incomplete market information. In testing this hypothesis, two data sets were used -Statistical Yearbook and the Family Income and Expenditure Survey. For reference purposes, they are referred to as Market I and Market II respectively. The equilibrium hypothesis was tested for uniform and upward and downward differential adjustment speeds. The uniform adjustment rate estimated from the reduced form price equation supports the hypothesis in both markets. The structural equations were then adjusted in the light of the imperfections in the market and structural parameters estimated using non-linear three stage least squares. Both upward and downward adjustment speeds in Market I suggest perfect flexibility in prices on annual basis. In Market II, prices are found to have been flexible downward but rigid otherwise. The upward rigidity in prices suggest excess demand. Perfect flexibility in prices on annual basis however may not suggest market equilibrium in a period less than a year. Consumers are found to be more price responsive than in previous studies implying a greater response of the demand for beef imports to changes in prices due to the liberalization than envisaged by previous studies. The demand for beef however is income inelastic suggesting a partial offsetting in the incremental demand for imports. Finally, consumers respond to changes in beef retail prices by consuming less fish and poultry.
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