Dairy Food Consumption, Production, and Policy in Japan

Dary Food Consumpton, Producton, and Polcy n Japan Isabelle Schluep Campo and John C. Beghn Workng Paper 05-WP 401 August 005 Center for Agrcultural and Rural Development Iowa State Unversty Ames, Iowa 50011-1070 www.card.astate.edu Isabelle Schluep Campo s a research assocate at the Swss Federal Insttute of Technology, Zurch. John Beghn s a professor n the Department of Economcs and Center for Agrcultural and Rural Development, and drector of the Food and Agrcultural Polcy Research Insttute at Iowa State Unversty. Wthout mplcatng them, we thank G. Moschn for comments and advce wth the econometrc estmaton, F. Dong and N. Suzuk for provdng data, a referee, and D. Sumner for coordnatng the revew of ths paper. Ths research was supported by USDA NRI grant IOW06559 Evolvng Demand for Dary Products n Asa: Polcy and Trade Implcatons. Ths paper s avalable onlne on the CARD Web ste: www.card.astate.edu. Permsson s granted to reproduce ths nformaton wth approprate attrbuton to the authors. For questons or comments about the contents of ths paper, please contact John Beghn, 578D Heady Hall, Iowa State Unversty, Ames, IA 50011-1070; Ph: (515) 94-5811; Fax: (515) 94-6336; E-mal: beghn@astate.edu. The U.S. Department of Agrculture (USDA) prohbts dscrmnaton n all ts programs and actvtes on the bass of race, color, natonal orgn, gender, relgon, age, dsablty, poltcal belefs, sexual orentaton, and martal or famly status. (Not all prohbted bases apply to all programs.) Persons wth dsabltes who requre alternatve means for communcaton of program nformaton (Bralle, large prnt, audotape, etc.) should contact USDA s TARGET Center at (0) 70-600 (voce and TDD). To fle a complant of dscrmnaton, wrte USDA, Drector, Offce of Cvl Rghts, Room 36-W, Whtten Buldng, 14th and Independence Avenue, SW, Washngton, DC 050-9410 or call (0) 70-5964 (voce and TDD). USDA s an equal opportunty provder and employer. Iowa State Unversty does not dscrmnate on the bass of race, color, age, relgon, natonal orgn, sexual orentaton, gender dentty, sex, martal status, dsablty, or status as a U.S. veteran. Inqures can be drected to the Drector of Equal Opportunty and Dversty, 3680 Beardshear Hall, (515) 94-761.

Abstract We explore and nvestgate Japanese dary markets. We frst provde an overvew of consumer demand and how t evolved after World War II. Usng hstorcal data and econometrc estmates of Japanese dary demand, we dentfy economc, cultural, and demographc forces that have been shapng consumpton patterns. Then we summarze the characterstcs of Japanese mlk producton and dary processng and polces affectng them. We next descrbe the mport regme and trade flows n dary products. The analyss of the regulatory system of the dary sector shows how ts ncentve structure affects the long-term prospects of varous segments of the ndustry. The paper concludes wth polcy recommendatons of how to reform the Japanese dary sector. Keywords: consumpton, dary, Japan, mlk, polcy, trade.

DAIRY FOOD CONSUMPTION, PRODUCTION, AND POLICY IN JAPAN 1. Introducton We explore and nvestgate Japanese dary markets and polces. Japanese dary s partcularly nterestng n the context of Asa because t s the most mature market among Asan economes. Consumers ncome s the hghest among Asan countres; consumer exposure to Westernzed dary products has been the longest among the same pool of countres as well. The analyss of Japanese dary markets, therefore, provdes lessons for other Asan countres wth emergng dary consumpton n terms of ther potental per capta consumpton patterns and composton of dary products consumed. The producton sde of dary markets n Japan s also nterestng because technology adopton and yeld mprovements have been rapd but n a context of solaton from world markets. The sector s also facng challenges common to many OECD (Organzaton for Economc Cooperaton and Development) farmng sectors, wth agng and wtherng farmng populaton, envronmental pressures, and some reconsderaton of agrcultural subsdes. We frst provde an overvew of dary consumpton and how t evolved followng World War II. Usng new econometrc estmates of Japanese dary demand, we then dentfy cultural and demographc shfters and economc forces that have been shapng consumpton patterns. We answer the queston of whether further growth n dary consumpton s lkely. We then summarze the characterstcs of mlk producton and dary processng n Japan. We follow wth a descrpton of the mport regme and trade n dary products. We further analyze the regulatory system of the dary sector and show how ts ncentve structure affects competton, prces, and the long-term prospects of the ndustry. These last two parts shed some lght on the lkely evoluton of the supply sde of these markets and the relatve composton of mports versus domestc supply. Fnally, we provde polcy recommendatons to reform Japanese dary.

/ Schluep Campo and Beghn. The Evoluton of Dary Consumpton Patterns.1. Changes n Japanese Detary Habts In the 60 years snce the end of World War II, the Japanese det has changed from one centered on rce, vegetables, and fsh to one that ncorporates many tradtonal Western food staples. Pror to World War II, rce accounted for about 60% of the calorc needs of Japanese people (Ohkawa, 1945). The fve-year perod from 1945 to 1950 was a tme of crss, characterzed by chronc labor shortages, decreased economc power, and devastaton of the urban landscape and the Japanese agrcultural ndustry. Durng ths perod, rce, potatoes and sweet potatoes, vegetables, and mnor cereals were the manstays of the Japanese det. Rce stll accounted for 48% of calorc needs (Aktan and Yoshda, 1988). Chronc food shortages and the lack of avalablty of dary products and meat meant that much of the Japanese populaton suffered from an nsuffcent ntake of calores and proten. A frst perod of change n detary habts occurred from 1950 to 1955. The government stablzed and mproved food dstrbuton through polces for ncreased food producton and strengthened crop collecton as well as acceptance of foregn food ad. Wth ths, the varety of food started to ncrease, nutrton mproved, and mnmum calorc requrements were fulflled. Provsons for a natonal school lunch program were also ntated durng ths perod. A typcal school lunch conssted of mlk, a roll, margarne, and one or two sde dshes (Japan Dary Councl, 001). Ths was the frst step toward ncorporatng Western food products nto the Japanese det. The ffteen years from 1955 to 1970 was a perod of dversfcaton and Westernzaton of eatng styles. Household ncomes rose rapdly, urban areas expanded, and nuclear famles were ncreasng n number. Home electrc applances such as televson sets, washng machnes, refrgerators, and toasters were now affordable. The consumpton of tradtonal Western foodstuffs such as mlk, butter, cheese, meat, and eggs grew rapdly. Rce consumpton, on the other hand, fell and accounted for only about 34% of calorc needs by 1970 (FAO, 001). The appearance of nstant Japanese foods such as nstant ramen (nstant noodles) (Hguch, 1991) amed to provde smplcty and convenence. The era between 1970 and 1990 was a perod of further dversfcaton of the varety of foods and dnng habts (FAPRC, 1997). More flexble eatng patterns evolved that were boosted by an ncreasng number of fast food stores and a flourshng food servce sector. Mcrowave

Dary Food Consumpton, Producton, and Polcy n Japan / 3 ovens became popular n the 1980s and automated the cookng process. The apprecaton of the yen as well as mprovement n the lberalzaton of mports begnnng n the md- 1980s led to a rapd ncrease of food mports. The fourth perod, begnnng n the 1990s (FAPRC 1997), s characterzed by the burst of the bubble economy and subsequent economc stagnaton, whch has tapered off expendtures on food n real terms and the food supply n calores as well as the stablzaton of the varety of food. Another example of the dversfcaton of Japanese detary habts s eatng out. How rapdly ths has taken place s well llustrated by the fact that the proporton of eatng out n the household food budget ncreased from 7% n 1963 to 17% n 003 (see Fgure 1). Smlarly, the food budget allocated to processed foods, ncludng pzza and cheese-contanng products, has rsen from 0% n 1963 to 30% n 003. In contrast, the share of the food budget spent on fresh products (.e., fresh meat, vegetables, and fruts) declned from an all-tme hgh of 37% n 1970 to 7% n 003. The underlyng forces of the structural change n food consumpton were hgher ncomes and changes n relatve prces, as well as a varety of other factors, ncludng Source: Derved from the Famly Income and Expendture Survey. FIGURE 1. Eatng out, fresh, and processed foods as percentage of total food expendture

4 / Schluep Campo and Beghn urbanzaton, populaton ncrease, educaton, occupaton, access to nformaton, changes n the employment structure partcularly the number of women n the labor force, an ncreasngly agng socety, and the structure of household unts. Japanese have ncreased consumpton of luxury foods, such as mported delcaces and premum meat cuts, and foods wth greater convenence of preparaton. The presence of food servce establshments servng nternatonal foods and ncreasng nternatonal travel by Japanese ctzens have also affected Japanese tastes (Johnson et al., 1998). Egatsu and Tokoyama (1990) attempt to make a broad classfcaton n terms of qualty, convenence, and dversfcaton. Regardng the queston of convenence, the ncreased opportunty cost of household labor s no doubt of great sgnfcance, and the argument that t would be ncorrect to consder only the ncreased proporton of workng women or housewves s convncng. Hguch (1991) sees a trend toward hgher qualty n food consumpton. For example, there s a large varety n beef qualty that leads to enormous prce dfferences. The same phenomenon s occurrng wth regard to rce. Hguch (1991) also observes a dversfcaton of detary habts that has brought about the development of substtute food tems (.e., varous types of processed food)... Dary Product Consumpton The consumpton of mlk and other dary products grew rapdly as the Japanese det became more Westernzed. Table 1 shows that the hghest average annual growth rates of per capta consumpton for mlk and dary products were recorded between 1965 and 1970. Per capta consumpton for cheese grew faster than for any other product. The rate of growth began to declne around 1975 and stayed low most of the tme for powdered mlk and butter. Fgure further llustrates these dary consumpton patterns. For mlk and cheese, growth rates were postve for most perods but lower than n the 1960s, as Westernzaton became more complete, brth rates declned, and competton from other beverages such as soft drnks and sports drnks ncreased. The Famly Income and Expendture Survey (FIES) data show that cheese consumpton has been on the rse, and to a lesser degree flud mlk consumpton as well. Butter and powdered mlk consumpton declned n earler perods but remaned more or less stable durng the past two decades. As food tastes matured, the percentage ncrease declned untl the md-1980s. Then a wne and cheese boom toward the end of the 1980s

Dary Food Consumpton, Producton, and Polcy n Japan / 5 TABLE 1. Annual percentage changes of dary product per capta consumpton n Japan Between 63-65 66-70 71-75 76-80 81-85 86-90 91-95 96-000 01-03 Flud Mlk 6.8% 6.1% -.1% 3.1% 1.8% 3.% 1.1% -0.3% -0.8% Powdered Mlk 4.1% 9.7% -4.5% -6.5% -.1% -4.5% 3.8% -0.7% -6.7% Butter 8.3% 0.% -1.9% -6.3% -1.5% 0.4%.9% 0.7% -1.9% Cheese 13.% 17.1% 5.9% 1.5% 1.0% 3.7% 5.1%.8% 0.1% Source: Derved from the Famly Income and Expendture Survey. Data are slghtly dfferent accordng to the MAFF Dary Dvson, whch gves the followng. Flud mlk: 63-65, 8.0%; 71-75, 0.0%; 76-80,.4%. For powdered mlk: 63-65, 1.9 %. For butter: 63-65, 8.9%; 66-70, 0.3%; 71-75,.0%; 81-85, -1.4%; 86-90, 0.5%; 91-95,.8%. For cheese: 63-65, 0.6%; 66-70, 17.0%. Note: Average rates between n years computed as (x t+n /x t ) (1/n) 1. Source: Derved from the Famly Income and Expendture Survey. FIGURE. Dary product consumpton per capta and at the heght of the bubble economy was observed, such that the annual percentage ncrease n cheese consumpton pcked up agan and stayed strong untl the md-1990s. In the late 1990s, the Japanese economy went through several crses, and consumers n general cut back on ther food consumpton. Startng n the early 1970s, European- and Amercan-style fast food establshments, ncludng famly restaurants and hamburger stands, began to sprng up throughout the

6 / Schluep Campo and Beghn country. Ths was accompaned by an ncrease n health-related problems such as obesty and hgh blood pressure. Partly because of these health concerns, begnnng around 1975, meat consumpton stagnated, and egg consumpton started to declne. Despte ths, consumpton of mlk and cheese ncreased steadly. Mlk powder consumpton declned between 1971 and 1990; t then ncreased for fve years and then began agan to decrease. Table compares consumpton levels n the Western world based on the Producton, Supply and Dstrbuton (PS&D) dsappearance data of the U.S. Department of Agrculture s (USDA) Foregn Agrcultural Servce. Data from the Food and Agrculture Organzaton (FAO) and data from consumer expendture surveys by other agences, such as Japan s FIES, vary but tell the same story, wth patterns n all data sets beng smlar. Compared wth other ndustralzed countres, per capta consumpton of flud mlk, butter, and cheese n Japan s much lower, whereas per capta mlk-powder consumpton s on a par or slghtly hgher. The per capta consumpton of flud mlk n Japan s roughly 43% of that of ts OECD partners. Butter s about 4% of that of the OECD partners and cheese consumpton s 15% of that of Japan s ndustralzed partners. It s worth notng that n Japan, unlke n Europe, the Unted States, and other Western countres, mlk and other dary products are not wdely used n cookng. The Japan Dary Councl notes that there s a potental for ncreased consumpton f the Japanese wll ncorporate more dary products nto ther cookng n the future. As Japan s ncome compares favorably wth most of ts ndustralzed partners, ncome dfferences wll not TABLE. Internatonal comparson of dary food consumpton 004 (kg per capta, per year) Country Flud Mlk Butter Cheese Skm Mlk Powder Swtzerland 93.8 6.0 17.1.1 EU-5 79. 4.7 14.1.4 Australa 10..9 11.9 1.7 New Zealand 90.1 6.5 7.0 1.3 Canada 87.7.9 10.7 1.5 Unted 9.1.0 14.1 1.3 States Japan 39.0 0.7.0 1.7 Sources: USDA-FAS PS&D database, and FAPRI 005.

Dary Food Consumpton, Producton, and Polcy n Japan / 7 be able to explan such between-country dfferences n consumpton patterns, although the evoluton of dary consumpton wthn Japan s strongly lnked to ts ncome growth. After World War II, when school lunches were ntroduced n elementary schools and chldren began drnkng mlk, mlk consumpton at home also ncreased. At ths tme, most dstrbuton was by home delvery. However, as the number of supermarkets n urban areas started to grow begnnng n 1965, the volume of mlk sales from such outlets sharply ncreased. Then, begnnng around 1975, convenence stores began handlng mlk and the volume of mlk sold through home delvery servces accordngly decreased. By 1983, supermarkets and convenence stores handled 5% of total mlk sales, whle mlk wholesalers handled 33%, of whch home delvery accounted for 13%. By 1999, supermarkets and convenence stores accounted for 70.% of total mlk sales; schools accounted for 9%; small stores for.0%, vendng machnes for 0.5%, consumer cooperatves for 13.1%, and home delvery servce for 5.% (estmates by the Agrculture and Lvestock Industry Corporaton [ALIC], Japan). Home delvery s showng sgns of resurgence n popularty. Ths reflects the ncreasng number of elderly and dual wageearner households that do not have the tme or ablty to shop at supermarkets, and the convenence of home delvery. It s also clear that some people want to obtan fresh mlk every day wthout havng to go to a market (Japan Dary Councl, 001). The average prce of a lter of mlk s about 00 (retal). Addtonally, the prce has not changed over the last 10 years (Japan Dary Councl, 001). However, Japanese consumers have been payng a lot more for dary products than consumers n other countres. The consumer nomnal protecton coeffcent (NPC), whch measures the rato of the prce pad by consumers and the border prce, has hovered around 400% n recent years (46% average for 000-0, 406% n 003) (OECD 003, 004). The NPC was even hgher n earler years; as ndcated by the OECD, t was around 600% durng the perod 1986-88. Complementary evdence by Scrmgeour (1998) shows smlar patterns at the retal level. Hence, even f dary demand s prce nelastc, such hgh prces must have stfled consumpton. These dstorton levels faced by Japanese consumers are the hghest among the OECD member countres, as the average consumer NPC s 191% for the whole OECD membershp. Therefore, a pror, hgh dary consumer prces may partly

8 / Schluep Campo and Beghn explan the relatvely lower dary consumpton levels n Japan, a conjecture we explore n the econometrc estmaton..4. Demographcs, Health, and Dary Consumpton Mlk s a regular food staple n about 87% of all Japanese households and s consumed by persons of all ages and both genders (NMPAJ, 1995). Consumpton, however, vares greatly by age and gender. As chldren advance from nursery school to kndergarten and to elementary school, where mlk s a part of all school lunches, per capta consumpton contnues to ncrease. However, after elementary school, school lunches are no longer provded and consumpton rapdly decreases. For young adults, the average daly per capta consumpton s only 1.4 declter (dl), less than half the daly average of elementary school students. Although young workng Japanese have substantal dsposable ncomes, they tend to follow prevalng trends to consume more sophstcated beverages, and mlk consumpton drops (NMPAJ, 1995). Ths trend s partcularly evdent among det-conscous young women, who on average consume 0.6-1 dl less than do men. However, when Japanese women enter ther thrtes, typcally after marrage and chldbrth, they begn to pay closer attenton to famly health (NMPAJ, 1995). At ths pont, per capta mlk consumpton ncreases to about 1.6 dl a day on average. Drnkng mlk s one of the most effectve ways of obtanng detary calcum, a nutrent lackng n many Japanese dets. Approxmately 80% of Japanese surveyed acknowledge the mportance of mlk n mantanng good health. In fact, mlk receves a health ratng three to four tmes hgher than that of sports drnks and Chnese oolong tea, two beverages enjoyng recent popularty (NMPAJ, 1995). The annual report of the FIES provdes data on the consumpton of dary products accordng to the age group of the household head. Mlk consumpton has been declnng steadly for the 9-and-under age group but has been ncreasng for all other age groups across tme. Yet, from 000 to 003 the mlk consumpton declned for the 30-to-50 and 70-and-over age groups, ncreased for the 60-to-69 age group, and stablzed for the 9- and-under and 50-to-59 age groups. It s especally remarkable that mlk consumpton for people older than 70 s the hghest among all groups. Ths mght have to do wth the steadly ncreasng number of retred people who seem to be very health conscous. Cheese has experenced an ncrease n popularty over the years among all age groups,

Dary Food Consumpton, Producton, and Polcy n Japan / 9 but especally among the 30-to-50 year olds and the people 60 years and older. Powdered mlk s consumed mostly among younger age groups and shows a decreasng trend over the years. It could be that powdered mlk s manly used for nfants and has no wder applcaton. Butter consumpton was at an all-tme hgh n 1990 for all age groups. Snce then t has declned sharply across all age groups. Several conjectures emerge from these stylzed patterns of consumpton. Frst, the shfts n demand for butter mght have to do wth the health conscousness of Japanese people. Butter s not wdely used n cookng; t s mostly consumed as a spread on bread. As such other spreads such as margarne can be easly substtuted. Second, the nward shfts (decrease) of powdered-mlk demand could be explaned as follows. After World War II, food ad brought powdered mlk to the country (a popular tem to send as food ad to developng countres), but wth rsng ncomes, the Japanese could afford mlk as a substtute for powdered mlk. Powdered mlk remans an tem for chldren, and wth the agng of the populaton ts consumpton wll decrease, other thngs beng equal. Thrd, flud-mlk demand may have experenced a major ntal outward shft caused by the ntroducton of the school lunch program n the 1960s, then some nward taperng as the Japanese populaton aged. Another potental shft of flud mlk demand may have occurred over tme wth promotons by the Japan Dary Councl, and an ncreased awareness of the healthy nature of mlk. We also nvestgate these non-prce shfters n the econometrc analyss. 3. Evdence on Dary Consumpton Decsons Prevous estmatons of Japanese dary demand nclude the derved demand for mported cheese products nto Japan by Chrstou et al. (005); Watanabe, Suzuk, and Kaser (1999) who used qualtatve fnal consumer survey data; and Watanabe, Suzuk, and Kaser (1997) who looked at the role of health concerns n decsons to consume mlk. We next report on our own estmaton effort, whch extends the comprehensve unpublshed econometrc analyss of Schluep Campo (00) wth the latest avalable (003) data. 3.1. Procedure and Estmaton The methodology used n the study s the almost deal (AI) demand system by Deaton and Muellbauer (1980) and ts varant, the semflexble almost deal (SAI) de-

10 / Schluep Campo and Beghn mand system developed by Moschn (1998), whch allows an easy mposton of concavty locally by reducng the rank of the substtuton matrx of prce responses of Hcksan demands. The approach s descrbed n detal n Appendx A. We estmate three specfcatons: frst a full system comprsng four dary products (flud mlk, powder mlk, cheese, and butter), and an all-other-goods aggregate; second a subsystem for food made of fve goods (the four dary goods and an all-other-food aggregate; and fnally, a subsystem of the four dary products. The mnmum dstance estmator s used to estmate the demand system. It s an approxmaton to maxmum lkelhood developed by Malnvaud (1980). The software package TSP 4.5 Through the Lookng Glass s used to carry out the econometrc analyss. 3.. Data Both the expendture and the prce data are taken from the Annual Report on the Famly Income and Expendture Survey (FIES) publshed by the Statstcs Bureau, Management and Coordnaton Agency, Japan (SBMCA, 1983, 1987, 1988, 1990, 000), and from the Japan Statstcal Yearbook (SBMCA, varous). There are 41 years of observaton from 1963 to 003 avalable. The survey covers all the consumer household types n Japan except one-person households, households that manage restaurants, hotels, boardng houses or dormtores, households whose heads are absent for a long tme, and foregner households (SBMCA, varous). About 8,000 households are randomly selected for the survey out of about 31 mllon qualfed households. The sample households are selected based on a three-stage stratfed samplng method. The samplng unts at three stages are the muncpalty (.e., cty, town and vllage), the survey unt area, and the household. Japan s stratfed nto 168 strata (SBMCA, 000). Essental for ths study s Table 17 (SBMCA, 000, 003) that contans Yearly Amount of Expendtures, Quanttes and Average Prces per Household (All Households - Workers Households). The study nvolves four dary food groups and two aggregates of other goods. Expendtures are per annum n yen. Dary goods and the all-other-food aggregate expendtures are deflated by the food prce ndex whle expendtures on all other goods are deflated by the consumer prce ndex (CPI). Dary good prces per year (n yen) are deflated by the food prce ndex. The CPI s a proxy for the prce of the all-other-goods aggregate and the food prce ndex one for the all-other-food aggregate.

Dary Food Consumpton, Producton, and Polcy n Japan / 11 3.3. Results In ths secton we present key results on the full-expendture SAI specfcaton and comments on results from other specfcatons. Results are shown n Tables 3 and 4. The results of the three expendture specfcatons and the two approaches (AI, SAI) are contaned n Appendx B. Income/expendture elastctes are always postve for flud mlk, powdered mlk, and cheese. The expendture elastcty of butter demand s negatve for four out of the sx estmatons (the two full-expendture systems wth AI and SAI, the food-expendture system wth AI, and the dary expendture system wth SAI). The sgnfcance of the expendture coeffcents ncreases from the full expendture system to the food expendture system but then decreases slghtly n the dary sub-expendture system. These results are not nconsstent but show that the lnk between aggregate expendture and food expendture could be approxmate by a proportonal move, but then the lnk between TABLE 3. Marshallan elastctes at the mean pont, rank 4 SAI model Wth respect to Elastcty of p ofnf p fm p c p pm p b Expendture (1) Other food & non-food -1.00 0.00 0.00 0.00 0.00 1.00 () Flud mlk 0.39-1.10-0.05 0.01-0.04 0.80 (3) Cheese 1.15-0.53-1.9-0.11-0.06 0.83 (4) Powdered mlk -0. 0.07-0.13-1.8 0.3 1.4 (5) Butter 0.91-0.78-0.10 0.50-0.16-0.37 Mean share 0.990 0.008 0.001 0.001 0.000 TABLE 4. Hcksan elastctes at the mean pont, full rank SAI model Wth respect to Elastcty of p ofnf p fm p c p pm p b Other food (1) & non-food -0.01 0.01 0.00 0.00 0.00 () Flud mlk 1.18-1.10-0.05 0.01-0.04 (3) Cheese 1.97-0.5-1.9-0.11-0.06 (4) Powdered mlk 1.01 0.08-0.13-1.8 0.3 (5) Butter 0.54-0.78-0.10 0.50-0.16 Mean share 0.990 0.008 0.001 0.001 0.000

1 / Schluep Campo and Beghn food expendture and dary-only expendture s not proportonal at all as the expendture response of butter changes sgns. Own-prce responses are large n absolute values (prce-elastc) and cross-prce effects are more modest as one would expect and suggest that dary products are substtutes except for cheese, whch appears as a complement. Flud mlk and mlk powder are substtutes, as suggested by Tables 3 and 4. Ths substtuton holds n four of the sx estmated systems but s reversed n the food-expendture estmaton. The flud to powder mlk substtuton s consstent wth stylzed facts of consumpton patterns away from mlk powder toward flud mlk. The substtuton effect appears partcularly strong n the dary sub-expendture system. The trend varable nfluences all dary products postvely n most of the estmated systems. Ths persstent result ndcates that some fundamental nfluence has been at work, whch s not explaned by prces, expendture, and demographc dynamcs (agng, populaton densty, female partcpaton n the labor force) ncluded n the specfcaton. The postve trend result s consstent wth the postve nfluence of promoton and health awareness campagns dscussed n secton. Trends are always challengng to pn down as several effects could have been captured n a sngle varable. In any case, the trend does not account for populaton nfluences already accounted for n the estmaton (populaton densty, agng and other demographc aspects). Cheese s postvely nfluenced by agng (rsng dependency rato). All the other per capta consumptons of other products are negatvely nfluenced by agng. The agng result s consstent wth the taperng of the ntal boom created by school programs n the early 1960s as populaton ages. Populaton densty, a lnear transformaton of populaton, has been growng faster than consumpton per capta as suggested by the negatve nfluence of ths varable on per capta consumpton. As shown n Appendx B, some egenvalues of the substtuton matrx are postve but most of these postve egenvalues are near zero, except for the AI and SAI food expendture systems for whch the egenvalue assocated wth other food s a bt larger. Gven that these volatons of curvature are mnor, ther correcton nduces lmted changes n qualtatve results as shown when comparng AI and restrcted SAI specfcatons of any gven expendture system.

Dary Food Consumpton, Producton, and Polcy n Japan / 13 4. Dary Supply and Imports 4.1. Structure of the Dary Sector Commercal dary farmng began n Japan n the late Mej era, about 100 years ago. However, t was not untl the early 1950s that t developed on a full scale, about the same tme that the school lunch system was ntroduced n elementary schools. The total annual raw mlk producton n Japan was about 8.36 mllon tons n 004 (FAPRI 1997). Currently there are approxmately 30,000 dary farms (see Fgure 3), but data on the number of dary cattle vary. USDA PS&D data ndcate a total of 936,000 dary cows. FAO data ndcate a hgher number (1.1 mllon head) of dary cows and lower yelds but smlar mlk producton for 004. Japanese data from the Mnstry of Agrculture, Forestry and Fsheres (MAFF, varous) ndcate a much hgher number of head (1.7 mllon head) but mlkng cattle numbers are close to those of the USDA (1999). Dary farm operatons are small on average but ths average hdes a rather wde dstrbuton of farm sze. Larger farms are more prevalent n the north of Japan (Hokkado). FIGURE 3. Evoluton of dary farms

14 / Schluep Campo and Beghn Relatve to rce farmng, dary farms tend to be much more proftable. About 60% of the mlk producton s used for flud mlk and the remanng 40% s processed nto other dary products such as cheese, butter, and powdered mlk (MAFF, varous). Although Japanese agrculture s centered on rce, whch accounts for one-thrd of gross agrcultural ncome and s cultvated on roughly 40% of farmland, dary, lvestock, fruts, and vegetables are also mportant sectors of Japanese agrculture n terms of value added. Dary represents about 8% of agrcultural value added but only about 1.3% of the number of farms. In places where dary farmers have to compete wth rce farmers t s stll more attractve to grow rce for human consumpton gven the hgher protecton gven to rce producers, whch explans why dary farmers usually operate on small acreage and buy most of the feed. Only n regons that are not sutable for rce, such as n Hokkado, are dary farms larger. The Hokkado regon s larger dary farms specalze n processed dary products. About 75% of Hokkado s mlk goes to processng. For the rest of Japan, the opposte s true. More than 80% of the mlk s consumed as flud mlk and less than 0% s processed. About two-thrds of the processng factores are small, producng less than 15,000 mt of flud mlk per year. However, large factores have emerged n the last decade that are more effcent (Prtchard and Curts, 004). Dary processors suffer from tarff de-escalaton, meanng that flud mlk faces much hgher tarffs than does cheese, whch mples that the domestc ndustry s not encouraged to produce value-added products such as cheese. The effectve protecton of dary processors s lmted f not negatve snce flud mlk gong to processng s expensve and the protecton on some dary products s lmted. Cheese mports have expanded a lot, although domestc cheese producton has expanded at the same rate. Self-suffcency n cheese has changed lttle n the last 15 years, although overall dary self-suffcency has decreased as cheese mports have grown substantally both n value and volume terms and have become the largest component of dary mports. 4.. Recent and Present Dary Farm Polcy Before 001, Japanese dary polcy was composed of three basc programs: prce supports for mlk used for manufactured dary products, classfed prcng and revenue poolng through prefectural mlk marketng boards, and mport quotas (Suzuk and Ka-

Dary Food Consumpton, Producton, and Polcy n Japan / 15 ser, 1994). The Japanese dary ndustry conformed to producton gudelnes set by the government and based on supply/demand data provded by the ALIC. In order to assure the stable supply of raw mlk, a subsdy system for dary producers was establshed n 1965. Snce then, the government has set producton celngs n order to prevent market surpluses and prce nstablty. Furthermore, dary producers voluntarly organzed a planned producton system n 1979. Annual producton allowances based on demand estmates were determned by the Japan Dary Councl and were allotted to each prefecture (nne n total). In turn, the authortes on the prefecture level set producton quotas for ndvdual agrcultural cooperatves and dary farmers wthn the prefecture. Allocaton formulas vared among the dfferent prefecture councls. Untl 1995, producton quotas were under the control of the natonal and prefectural councls. In 1996, however, a system allowng ndvdual dary farmers to adjust producton quotas among themselves was nsttuted. Defcency payments based on the dfference between the average cost of producng one klogram of mlk (the guaranteed prce) and the prce dary producers receve for the same quantty (the standard transacton prce) were determned annually. Also, farmers receved a subsdy for ther annually determned producton quotas. That s to say, the prce the dary producers receved was the guaranteed prce (standard transacton prce pad by the mlk processors plus the defcency payments pad by the government). In addton, before 001, flud mlk prces were determned by negotatons between each marketng board and the processors that t suppled. Gven the manufacturng mlk prce, prefectural marketng boards usually obtaned flud mlk premums through ther market power (Suzuk and Kaser, 1994). The recent trend has seen steady prce declnes for flud mlk that progressed ndependently of producton costs to dary farmers (Japan Dary Councl, 001). The current dary polcy has been n place snce 001 (Suzuk and Kaser, 005). The producton quota s stll n effect and s determned as before. All government-regulated prces were abolshed, ncludng the guaranteed manufacturng mlk prce for farmers, and the standard transactons prce for manufactures. The dfference between the guaranteed prce and the standard transactons prce used to be pad to farmers as defcency payments. In the new system, only the amount of the former defcency payment, almost

16 / Schluep Campo and Beghn 10/kg, s mantaned as a fxed payment. The fxed payment level s revewed every year, consderng the demand/supply stuaton and farmers producton costs. Now, the prvate market determnes the manufacturng mlk prces. Regardless of the market prce level, farmers receve the market prce plus the fxed payment. However, the new polcy has a bult-n securty measure n case of a sudden prce declne and operates along the lnes of a revenue nsurance program. A fund has been establshed that s charged by deductons of 0.4/kg of mlk that s delvered and by an addtonal 1./kg of mlk quota for whch farmers are gettng subsdes. These funds are then matched by government money. If the prce for manufactured mlk s below the past three-year average, farmers can receve 80% of the dfference between the current prce and the past three-year average from the fund. Overall, t seems that the polcy changes have been cosmetc rather than fundamental n nature. The essence of the polcy s that t s pad by consumers through market prces that are much hgher than ther nternatonal equvalents. Accordng to the OECD, the market prce support (MPS) component ndcates the producer support obtaned through market prce dstortons. In Japanese dary producton the MPS has been about 90% of the producer support estmate (PSE) between 1986 and 003, wth very lttle change durng ths perod. Stll, accordng to the OECD, the consumer NPC explans 96% of the producer NPC durng the same perod and wth vrtually no change. Hence, the nature of polcy has remaned the same n the last two decades. The level of support, as measured by the PSE per unt of producton n nomnal terms, has been fallng from 91,000/mt n 1986 to a lttle less than 66,000/mt, qute a substantal decrease, especally n real terms, although the nterventon level remans extremely hgh. 4.3. Dary Trade Patterns and Polces As part of the Uruguay Round Agreement on Agrculture (URAA), Japan accepted tarffcaton for all of ts agrcultural commodtes except rce, whch receved a waver. 1 Agrcultural products wth pror mport bans (or very low access) faced mnmum market access commtments as a part of tarff rate quota (TRQ) programs and others held the current market access provsons (IATRC, 001). Japan has enforced TRQs strctly durng the frst four years of the URAA mplementaton perod. Under the URAA, Japan converted 8 commodtes from non-tarff protecton to tarffs (IATRC, 1997). TRQs

Dary Food Consumpton, Producton, and Polcy n Japan / 17 were created for 19 tems (IATRC, 001). Of these, 10 are dary products, ncludng skm mlk powder, whey, and butter (see Table 5). In Japan, mports of dary products such as mlk powder, condensed mlk, buttermlk powder, whey, and butter are managed by the ALIC, a state tradng enterprse (STE). The major excepton s natural cheese, for whch nether the STE nor an mport quota apples (Suzuk and Kaser, 1994). The mport penetraton rate for cheese s above 80% for Japan, reflectng the relatvely low barrers on cheese and the lmted domestc cheese supply, whch suffers from negatve effectve protecton. Table 5 shows the TRQ structure wth the n-quota tarff level. No average tarff s calculated f several tarff lnes of a product are nvolved. As for the quota, the ntal levels are for 1995 and the fnal levels are for 000. If the ntal and the fnal quotas are the same, t s because Japan ddn t have to make commtments for the respectve products snce at the tme of the URAA Japan already had mported more than 5% of domestc consumpton. Prvate traders can mport dary products subject to out-of-quota tarffs (at the much hgher tarff). The markups on desgnated mported dary products are TABLE 5: Tarff Rate Quotas for Dary Products, Japan, 1995-000 and 003 Fll Rates Quota (tons) Tarff ( /kg or n %) Quota Fll Inquota Intal Fnal (%) Out of Quota Out of Quota Rate (003) Product Intal Fnal Skm mlk powder 7,64 7,64 0 466 396 40% (school lunch) Skm mlk powder (others) 85,878 85,878 Varous 466 + 5% 396 + 1.3% 41% Evaporated mlk 1,585 1,585 Varous Varous varous 9% Whey (feed) 45,000 45,000 0 Varous varous 51% Whey (nfant) 5,000 5,000 10% Varous varous 4% Butter & butter ol 1,873 1,873 35% Varous varous 1% Concentrated whey 14,000 14,000 Varous Varous varous 7% Prepared edble fat 18,977 18,977 5% Varous varous 100% Other dary products 14,640 133,940 Varous Varous varous 99% Desgnated dary products 137,0 137,0 Varous Varous varous 9% Source: Notfcaton by Japan to the WTO (004); IATRC 001; quota fll rates are from WTO 004.

18 / Schluep Campo and Beghn bound by the Country Schedule of Japan. The bound markups were reduced by 15% between 1995 and 000 but startng from a very hgh level. For example, for out-of-quota skm mlk powder (others), there was a 1.3% ad valorem tarff plus 396/kg n 000. Domestc sale prces for dary products are based on mport prces, management costs, and domestc prces for dary products (IATRC, 001). The TRQ fll rates for dary products n Japan have been ncreasng over tme. They were rather low n the late 1990s but are now qute hgh, as shown n Table 5, and wth much varablty remanng. The lowest fll rates occur for butter, whey, and mlk powder. These low rates could be an ndcaton of non-tarff trade barrers, such as a cumbersome TRQ admnstraton and allocaton system. Dary product mport polcy n Japan seems to be desgned to mnmze the mpacts of mports on domestc markets n whch Japanese farmers compete. As a result, consumer benefts are reduced, and allocaton across mport supplers has been affected (IATRC, 001). Import quotas regulated the mportaton of ce cream to Japan untl the 1980s, whch was then lberalzed n 1990. Because of ths regme change the volume and the value of mports ncreased rapdly n the followng years. Between 1990 and 1995, the volume of mports multpled ten-fold and the value sx-fold. The strong yen and consumers seekng real value and hgh qualty were the drvng forces (JETRO, 00b). However, snce 1995, ce cream mports have leveled off because of declnng mports of prvate brand ce creams from Australa and New Zealand a cheaper type of ce cream that ddn t sut the publc s taste n Japan. Between 000 and 00 even mport of the preferred super premum ce cream slacked because of the weaker yen. No precse fgure s avalable for mported products share n the Japanese market. The ndustry estmates mports share to be about 5%. Ths fgure may seem small, but lcensed Japanese manufactures produce most of the foregn branded ce cream n Japan. The majorty of the mports orgnate from the Unted States (mostly super premum and premum ce creams), followed by mports from Australa and New Zealand. The tarff rates on ce cream vary between 1% and 9.8% accordng to the content of mlk fat and added sugar. In addton, a consumpton tax of 5% s rased on the mport value plus the tarff. Ice cream s shpped n refrgerated contaners, whch are smaller than normal contaners, leadng to lower effcency and hgher transportaton costs. It s then delvered to dstrbutors at the port and

Dary Food Consumpton, Producton, and Polcy n Japan / 19 carred by refrgerated trucks to wholesalers or the warehouses of retalers. Most products are dstrbuted through wholesalers. Recently t has become more common to see leadng mass merchandsers and convenence stores jontly plannng new products wth overseas manufacturers and mportng ther orgnal products. Also because of cost-cuttng measures, a growng number of corporatons choose jont plannng and drect delvery (JETRO, 00b). Japan dstngushes broadly between natural and processed cheeses. Natural cheese ncludes soft cheeses (e.g., Camembert or mozzarella), sem-hard (e.g., Gouda), hard (e.g., Emmental and Gruyère) and extra hard cheeses (e.g., Parmesan). Processed cheese s made out of one or more varetes of natural cheese. Examples are carton packaged, slced, spread cheese, and cream cheese. Processed cheese became popular n the 1960s. Natural cheese was frst not much apprecated n Japan because of the strong aroma. But wth the wdespread adopton of home refrgeraton, ncreasng Westernzaton, the emergence of processed foods (pzza, cheesecake), and the ncreased nternatonal travel of the Japanese, gradually natural cheese assumed a larger role n Japanese cusne (JETRO, 1999). Today, most mported cheese conssts of natural cheese. On natural cheese mports ntended for drect consumpton Japan leves mport tarffs rangng between.4% to 40%. The mported natural cheese for drect consumpton has a 90.1% share (00) n the Japanese market. Australa s the leadng exporter of natural cheese to Japan. On a volume bass t accounts for 39.7% (001). Together wth second-place New Zealand (6.5%) exports from these two natons n Oceana account for nearly 66.% of all mports. Natural cheese destned as an ngredent for processed cheese s mported through the pooled quota and enters Japan duty free up to.5 tmes the amount of Japanese domestc natural cheese producton used for processed cheese. An over-quota tarff of 35% s appled to mports exceedng that volume. Importers must apply to the MAFF for the n-quota duty rate. Further, qualfed applcants must own or operate processed cheese producton facltes and must prove that they are also utlzng natural cheese made n Japan as raw materal (a domestc purchasng requrement). Along wth the applcaton they must fle a domestc natural cheese utlzaton plan for the tme perod stpulated n the TRQ notce. After the postve examnaton, a TRQ certfcate s ssued statng the

0 / Schluep Campo and Beghn quota amount. When ths certfcate s presented at customs, the quota amount lsted s duty free. In 001, New Zealand s share of natural cheese mports under the TRQ was 43.9% Australa s was 39.1% and Canada s was 5.7%. For New Zealand, the Japanese cheese market s a so-called desgnated market, for whch the export lcensng regme apples. Fonterra, New Zealand s largest dary cooperatve, has exclusve rghts to export cheese to Japan. Most processed cheeses are domestc products made from a blend of mported and domestcally produced raw ngredents. Imported processed cheese accounts for just 6.4% (00) of the processed cheese market. Japan leves a 40% ad valorem tarff on processed cheese mports. Butter mports generally compensate for shortages of domestcally produced Japanese butter relatve to demand. Hence, butter mports are just a very narrow resdual market. To stablze Japanese butter prces, all butter mports pass through a sngle mporter channel, the ALIC (JETRO, 00a). Snce 1996, butter mports have shrunk to the 300-350 ton range. The butter mports share s only around 1%. 3 The state tradng mportng regme of the ALIC bascally ensures that a much hgher domestc flud mlk prce can be mantaned. Japan mports butter manly from New Zealand, whch had a share of 45.5% on a volume bass n 001. Australa ranks second wth a share of.1%. Though t s possble to mport butter through the pooled quota at the n-quota rate of 35%, ths s lmted to butter for specfc uses (e.g., for dsplay at nternatonal trade fars and for arplanes on nternatonal flghts) (JETRO, 00a). In order to apply for the prmary duty rate, mporters must apply to MAFF and obtan a TRQ certfcate. Ad valorem equvalents for over-quota rates for the butter TRQs range between 465.5% (Nuzum, 1999) and 59% (OECD). Clearly these rates are prohbtve n addton to the mport monopoly by the ALIC. JETRO (00a) notes that mported butter dffers consderably n terms of texture and aroma from Japanese butter and that most mported butter s used by dary companes n processed dary foods, ce cream, and spreads. Further, very lttle mported butter s consumed drectly by end users. The ALIC sells through open compettve bddng mported butter to domestc purchasers (JETRO, 00a). Only confectoners and dary product processors are allowed to submt bds, and the standard lot sze s about.5 tons (JETRO, 00a).

Dary Food Consumpton, Producton, and Polcy n Japan / 1 Under customs tarff classfcaton, mlk and cream are dvded roughly nto nonprepared mlk; concentrated mlk, and cream (powdered or condensed); and curdled, fermented or acdfed mlk and cream. Mlk and cream are further classfed by fat content, added sugar, and usage. Powdered skm mlk s mported through the TRQ system. TRQ quanttes depend on the end use, such as for school lunch, and chld welfare nsttutons, for feed, or for other uses. To apply for the prmary duty rate, mporters submt a TRQ applcaton form to the MAFF to obtan a TRQ lcense. The mport of powdered skm mlk for uses other than for feed, school lunch, or other specal uses s manly managed by the ALIC (JETRO, 003) and product s sold to major dary ndustry manufacturers or those afflated wth agrcultural cooperatve assocatons. 5. Conclusons We looked at market and polcy developments n Japanese dary over the last four decades. Consumpton patterns have evolved wth ncreasng ndvdual consumpton of cheese and flud mlk. The ndvdual consumpton of butter and mlk powder has been stagnatng, as butter s not wdely used n cookng or as a spread and as flud mlk has been substtuted for mlk powder. Overall, dary consumpton per capta has ncreased substantally. Ths ncrease n per capta consumpton s lnked to a declne n real dary prces, rsng ndvdual ncomes, and changes n taste/nformaton. The ncome and ownprce responses of ndvdual dary consumpton are large; real prces, although stll very hgh by nternatonal standards, have been fallng dramatcally n the last 40 years. Income growth between 1960 and 003 has also been mportant, even though ncome stagnated n the last decade. As these prces wll eventually fall wth further trade lberalzaton, further ncreases n consumpton can be expected. Hgher cheese consumpton s further lnked to the ncreasng consumpton of convenence and processed foods by Japanese consumers. Flud mlk s lnked to varous factors such as health concerns and promoton campagns. As Japan s populaton has been ncreasng n the last 40 years, aggregate market consumpton has been rsng, although not at as hgh a pace. Japan consumes much less dary than do other OECD countres wth comparable purchasng power. Hgh consumer prces are a major part of

/ Schluep Campo and Beghn the explanaton but a less developed taste for dary products n Japan s also a reason and s lkely to be a recurrent theme n Asan markets. The Japanese dary supply s stll solated from world markets because of prohbtve tarffs, the hgh transportaton cost, and the pershablty of flud mlk. Processors have been dsadvantaged by ther low level of effectve protecton and by a lack of scale economes. The flud mlk supply has expanded through substantal yeld ncreases, although the cost of producton s very hgh and the typcal dary farm sze s small and neffcent. The greater avalablty of dary products has been acheved through trade, especally for cheese products from Australa and New Zealand. Hence, much lke the stuaton n Korea, domestc mlk producers n Japan wll reman sgnfcantly solated from world markets, at least for the fresh mlk segment of ther demand. The derved demand for mlk from processors s unlkely to expand n ths context of trade ntegraton unless the prce of mlk s drastcally reduced. The protecton of flud mlk producton could be greatly decreased by a producton quota expanson and a reducton n farm subsdes for several reasons. Flud mlk enjoys sgnfcant natural protecton thanks to hgh trade and transportaton costs and pershablty. Flud mlk prces n Japan are a heresy when compared wth New Zealand equvalents. They could be decreased by half and would stll reman prohbtve for flud mlk trade but ths would sgnfcantly mprove the ncentve structure of processors and would allow them to compete wth nternatonal exporters n ther home markets. Lower mlk prces would also nduce an acceleraton of the ratonalzaton of dary farms, as the dary farmer populaton s agng and retrng. Incentves to voluntarly ext the ndustry, lnked to retrement securty, could be put n place. The poltcal economy of agrcultural protecton n Japan favors rce over dary as rce remans extremely protected and mports are margnal, unlke the case of dary, whch exhbts sgnfcant mport penetraton and low self-suffcency ratos, but ths phenomena s occurrng n processed dary markets, not n the flud mlk market. Flud mlk s protected by pershablty, hgh transportaton cost, and prohbtve trade barrers and domestc farm subsdes. In the World Trade Organzaton negotatons, dary may well be gven up as a barganng chp to protect rce, especally n the barganng wth the Carns group members such as Australa and New Zealand. The latter are the two

Dary Food Consumpton, Producton, and Polcy n Japan / 3 largest dary exporters to Japan and would stand to gan the most from further dary trade openng (Prtchard and Curts 004). Ths s relatve, of course, as the proposed average cuts n bound tarffs may not lead to further actual trade openng of any partcular or senstve product. Further mports may not expand n ths round of negotatons, as actual TRQs are already above mport commtments (mnmum mport levels as 5% [URAA] or 8% [Harbnson proposal] of consumpton) (Martn and Anderson, 005).

Endnotes 1. In 1999 Japan changed ts rce mport polcy to tarffcaton wth mnmum market access (68,000 tons n 000) (IATRC, 001).. The success of a unque New Zealand cheese, Egmont, n the largest market, Japan, has prompted the development of another cheese especally for use n processng (and that s mported through the Pooled Quota). Japan buys more than 50,000 tons of New Zealand cheese a year worth over NZ$35 mllon, wth most beng used n food preparatons such as pzza toppngs. 3. Accordng to the JETRO (00a) marketng gudebook for major mported products, the reason for ths low mport share s that butter requres freshness. However, butter can be stored frozen (-18 to -4 degrees Celsus eght to twelve months; at -10 degrees for up to three months; and at -1 to +4 degrees up to two months).

Appendx A Demand System and Estmaton The Almost Ideal (AI) Demand System Ths system s both flexble and easy to estmate. The AI model gves an arbtrary second-order approxmaton to any demand system. Deaton and Muellbauer (1980) show that t satsfes the axoms of choce, aggregates over consumers wthout a need to assume parallel Engel curves, and has a functonal form consstent wth known household budget data. In addton, t s smple to estmate and t can be used to test whether or not demand functons have the desrable propertes of homogenety and symmetry. The begnnng pont for the AI model s the expendture functon, c(u,p), the least amount of money needed to reach utlty level u when prces are p. The AI expendture functon s (Deaton and Muellbauer, 1980) ( u,p) log c = α log( ) 1 o + α p + γj log( p )log( p j ) + uβo p where α, β and γ j j are parametersand,j = 1,..., n ndex the goods. β, (A.1) Deaton and Muellbauer (1980) chose the partcular cost functon because t s flexble, t represents preferences that permt exact nonlnear aggregaton over consumers, and t results n demand functons wth desrable propertes (Blancfort, Green, and Kng, 1986). Applyng Shepard s Lemma yelds demand functons expressed n expendture shares: log ct log( p ) ( u, p) c ( u, p) = p p pq = c( u, p) c ( u, p) = w, (A.) where, w s the share of good n total expendture c. After approprate substtutons we obtan the AI model n expendture share form: w x = α + γ j log( p j ) + β log. j PP (A.3) Here, PP s a translog prce ndex defned by

6 /Schluep Campo and Beghn log PP = α log( ) 1 o + α p + γ j log( pt )log( p j j ). (A.4) As a lnear approxmaton to ths demand system, Deaton and Muellbauer (1980) adopt Stone s (1954) ndex: * log PP = w log( p ). (A.5) PP s assumed to be approxmately proportonal to PP*. Ths typcally provdes a good approxmaton of the orgnal system and s relatvely easly estmated. Snce the Stone share-weghted prce ndex s not nvarant to changes n unts of measurement of prces (Moschn, 1995), the commonly used procedure of normalzng the prce seres on ther average value s appled. Equaton (A.3) s redefned as w log( ) log. * x = α + γ j p j + β j PP (A.6) Ths s referred to as the lnear AI demand system. The th budget share s expressed n terms of prces and real ncome or expendtures, (x/pp*). Parameter α s the ntercept and represents the budget share when all logarthmc prces and real expendtures are zero. Parameter γ j s equvalent to the change n the th budget share wth respect to a percentage change n the jth prce wth real expendtures or ncome held constant; that s, γ j = w t / log( x / PP). The β represents the change n the th budget share wth respect to a percentage change n real ncome or expendtures wth prces held constant; that s, β = w t / log( x / PP). The followng three restrctons are mposed on demand parameters: Addng up: α = 1, γ j = 0, β = 0; Homogenety of degree zero n prces and ncome: γ j = 0; j (A.7) (A.8) Slutsky Symmetry: γ = γ. (A.9) Demand functons must add up (eq. (A.7)). That s, total expendture on goods and servces must equal total ncome less taxes less savngs. The addng-up condtons mply a sngular varance-covarance matrx for the dsturbances and ths s handled by deletng the nth equaton. Equaton (A.8) s known as the homogenety restrcton. An equal percentage ncrease n ncome and prces should have no effect on what s purchased. Ths s also known as the absence of money lluson. Deaton and Muellbauer (1980) note that j j

Dary Food Consumpton, Producton, and Polcy n Japan / 7 to get ths result, we need to assume that prces and expendtures play no role n choce other than n determnng the budget constrant, so that the unts n whch prces and expendtures are measured have no effect on the consumer s percepton of opportuntes. Fnally, theory asserts that the substtuton matrx s symmetrc (eq. (A.9)). The Locally Concave Almost Ideal Demand Model Moschn (1998) apples the concept of a semflexble functonal form to the AI demand system of Deaton and Muellbauer (1980). The semflexble almost deal demand model (SAI model) deals well wth two problems that arse n the AI model: the curvature property and the degrees of freedom. In the AI model, concavty of the expendture functon, whch mples that the Slutsky matrx s negatve semdefnte, cannot be ensured by any restrctons on the parameters alone. It can be checked by calculatng the egenvalues of the Slutsky substtuton terms Sj = h ( p, u) / p j, where h (p,u) denote Hcksan demands. The Slutsky substtuton terms for the AI model can be wrtten as S j = x P P j γ j + ww j δ w j x + ββ j log, PP (A.10) where δ j s the Kronecker delta ( δ j = 1 for = j and δ j = 0 for j ). Wthout loss of generalty, one can choose the sample mean (pont wth hghest sample nformaton) as the pont at whch concavty s mantaned such that p = x = 1. Then at ths pont, w = α. The substtuton term at the mean pont (.e., θ j = Sj when p = x =1) then reduces to θ j = γ + α α δ α. (A.11) j j j For concavty to hold at the mean pont, the matrx [ θ j ] must be negatve semdefnte. Equaton (A.11) s used to facltate the mposton of concavty at the mean pont. Frst, the γ j can be rewrtten n terms of { θ j, α }. It s also recognzed that the homogenety property of demand mples γ = θ = j j j j 0. Concavty of the (n-1)x(n-1) matrx Θ [ θ j ] can be mantaned by usng the verson of the Cholesky decomposton mplemented by Dewert and Wales (1987), such that Θ = T ' T where T [ j ] s an (n-1)x(n- 1) upper trangular matrx. Hence, the θ j parameters are rewrtten n terms of the j parameters and so Θ = T ' T. As an example, f n = 5, then the 4 x 4 matrx T can be represented as follows: T = 0 0 0 11 1 0 0 13 3 33 0 14 4 34 44.

8 /Schluep Campo and Beghn The matrx Θ s then Θ = 11 11 1 1 symmetrc 1 13 13 + 11 3 13 + 3 + 33 13 14 14 1 + 14 + 11 3 4 + 14 + 4 34 4 + +. 33 34 44 Takng all these reparametrzatons nto account, the locally concave AI model can be wrtten as w p = α + α log log( P α s s P s= 1 ) + β log x PP, = 1,,..., n 1. (A.1) where n s the number of goods, and defned by α P s a prce functon homogeneous of degree plus one, α log P = α log p. (A.13) The aggregator functons are homogenous of degree zero n prces and satsfy log P s n 1 j= s p log sj p j n, s = 1,,..., n 1. (A.14) To smplfy the estmaton procedure, the Stone prce (PP*; see eq. (A.5)) ndex s used to approxmate the translog prce ndex that s of the form log PP = log P α 1 (log P α ) + 1 n = 1 α (log p ) 1 n 1 s= 1 (log P s ). (A.15) Imposng Concavty The degrees-of-freedom problem s allevated by restrctng the rank of the substtuton matrx (.e., the substtuton possbltes across goods) of the locally concave AI system as of equaton (A.1). Ths yelds the SAI demand system. Also, the SAI model can handle volatons of local concavty. When the unrestrcted model n equaton (A.6) yelds postve egenvalues of the Slutsky matrx and hence volates concavty, then the estmaton of the locally concave model n equaton (A.1) may be dffcult. A possble soluton to ths problem may be a model wth a substtuton matrx of rank K < (n - 1) such that convergence of the parameters of the locally concave model can be acheved. Rank K < (n - 1) can be accomplshed by settng j = 0 for all > K. Followng up on the prevous example wth n = 5, we choose K =. Ths requres us to set the last two rows of the T matrx to zero; n other words, we do not allow any substtuton between goods

Dary Food Consumpton, Producton, and Polcy n Japan / 9 three and four. Hence, the Θ s as follows: Θ = 11 11 1 1 symmetrc 11 1 13 13 13 + + 3 3 1 14 11 13 14 14 14 + + + 4. 3 4 4 The SAI system of rank K s then w p = α + α log α P log( P s s= 1 s K s ) + β log x PP, (A.16) α where P and P s are defned n equatons (A.13) and (A.14), respectvely. The restrctons = 0 for all s > K mply log( P ) 0 for all s > K. s s

Appendx B Detaled Econometrc Results 1. Full system of four dary products (flud mlk, cheese, powdered mlk, and butter) and an all-other goods aggregate consstng of non-food and other food 1.a. Unrestrcted Lnear Almost Ideal Demand System: Non-food and other food, flud mlk, cheese, powdered mlk, and butter The lnear AI conssts of fve equatons; however, because of sngularty of the matrx, one equaton s omtted. The expendture share (w ) depends on the own prce and the prces of the other goods, a tme trend (tr), the percentage of females partcpatng n the labor force (r), the populaton densty (km), the dependency rato measure for the agng populaton (ku), and on total expendtures that are dvded by the Stone prce ndex (x / PP): x w1 = α 1 + d 1tr + e1r + f1km + l1ku + c11 log p1 + c1 log p + c13 p 3 + c14 p 4 + β 1 log ; PP x w = α + d tr + e r + f km + l ku + c1 log p1 + c log p + c 3 p 3 + c 4 p 4 + β log ; PP x w 3 = α 3 + d 3tr + e 3r + f 3km + l3ku + c13 log p1 + c 3 log p + c 33 p 3 + c 34 p 4 + β 3 log ; PP x w 4 = α 4 + d 4tr + e 4 r + f 4 km + l 4 ku + c14 log p1 + c 4 log p + c 34 p 3 + c 44 p 4 + β 4 log ; PP where: w = expendture share of category, w 1 = non food & other food, w = flud mlk, w 3 = cheese, w 4 = powdered mlk, w 5 = butter, Because of sngularty of the matrx, equaton (5) s omtted x = total expendture PP = lnear Stone prce ndex, tr = tme trend, r = percentage of females partcpatng n the labor force, km = populaton densty, ku = dependency rato, p = prce ratos (p 1 /p 5, p /p 5, p 3 /p 5 and p 4 /p 5 ), α, β, d, e, f, l, and the c j are parameter vectors that have to be estmated.

Dary Food Consumpton, Producton, and Polcy n Japan / 31 Table B-1. Parameter estmates of the lnear AI model wth four dary products and an all-other goods aggregate Number of observatons=41 Log lkelhood=1341.48 Schwarz B.I.C.=-154.78 Parameter Estmate std Error t-statstc P-value A1.989775.193585E-03 511.87 [.000] A.83665E-0.15707E-03 53.56 [.000] A3.755681E-03.7586E-04 7.3970 [.000] A4.648774E-03.50616E-04 5.887 [.000] B1.5198E-0.18958E-0 1.3915 [.184] B -.173085E-0.155180E-0-1.11538 [.65] B3 -.354704E-03.5449E-03-1.39377 [.163] B4.86640E-04.133E-03.19565 [.897] C11 -.1851E-0.9885E-0 -.41945 [.675] C1.18598E-0.38436E-0.539337 [.590] C13.0118E-03.397550E-03.508410 [.611] C14 -.41113E-03.34614E-03 -.696611 [.486] D1 -.7996.580916-4.80784 [.000] E1.040043.014517.75830 [.006] F1.559777E-03.17381E-03 4.3945 [.000] L1.13764E-0.71501E-03 4.88999 [.000] C -.889586E-03.197944E-0 -.449413 [.653] C3 -.41504E-03.3177E-03-1.8999 [.197] C4.167519E-03.913E-03.57509 [.565] D.06000.473806 4.34777 [.000] E -.030067.01046 -.49597 [.013] F -.41910E-03.10367E-03-4.0477 [.000] L -.101917E-0.1715E-03-4.59674 [.000] C33 -.4630E-03.154400E-03-1.59534 [.111] C34 -.3316E-04.156113E-03 -.1194 [.83] D3.335189.078645 4.604 [.000] E3 -.61780E-0.1146E-0 -.9456 [.003] F3 -.609798E-04.17906E-04-3.5677 [.000] L3 -.147300E-03.36609E-04-4.09 [.000] C44 -.353430E-03.3096E-03-1.5306 [.16] D4.84396.0681 4.1697 [.000] E4 -.138173E-0.0416E-0 -.6860 [.495] F4 -.504018E-04.14993E-04-3.36185 [.001] L4 -.1486E-03.316860E-04-3.94059 [.000] Equaton: EQ1: Non food and other food Dependent varable: W1 Mean of dep. var. =.99011 Std. dev. of dep. var. =.331734E-0 Sum of squared resduals =.108866E-04 Varance of resduals =.6558E-06 Std. error of regresson =.51594E-03 R-squared =.97568 LM het. test = 7.99960 [.005] Durbn-Watson = 1.0413 Equaton: EQ: Flud mlk Dependent varable: W

3 /Schluep Campo and Beghn Mean of dep. var. =.80891E-0 Std. dev. of dep. var. =.5980E-0 Sum of squared resduals =.75008E-05 Varance of resduals =.176831E-06 Std. error of regresson =.40513E-03 R-squared =.973039 LM het. test = 7.85941 [.005] Durbn-Watson = 1.11656 Equaton: EQ3: Cheese Dependent varable: W3 Mean of dep. var. =.7054E-03 Std. dev. of dep. var. =.93670E-04 Sum of squared resduals =.198057E-06 Varance of resduals =.483065E-08 Std. error of regresson =.69509E-04 R-squared =.435164 LM het. test = 3.63777 [.056] Durbn-Watson =.730 Equaton: EQ4: Powdered mlk Dependent varable: W4 Mean of dep. var. =.671113E-03 Std. dev. of dep. var. =.4966E-03 Sum of squared resduals =.14759E-06 Varance of resduals =.35998E-08 Std. error of regresson =.599985E-04 R-squared =.980017 LM het. test = 7.397 [.007] Durbn-Watson = 1.017 Table B-. Marshallan elastctes at the mean pont, AI model Elastcty of Wth respect to p nfof p fm p c p pm p b Income (1) Non food & other food -1.00 0.00 0.00 0.00 0.00 1.00 () Flud mlk 0.36-1.10-0.05 0.0-0.0 0.79 (3) Cheese 0.76-0.55-1.33-0.04 0.65 0.53 (4) Powdered mlk -0.4 0.6-0.05-1.54 0.71 1.04 (5) Butter 0.96-0.3 1.08 1.01 -.7-0.01 Mean share 0.990 0.008 0.001 0.001 0.000

Dary Food Consumpton, Producton, and Polcy n Japan / 33 Table B-3. Hcksan elastctes at the mean pont, AI model Elastcty of Wth respect to p nfof p fm p c p pm p b (1) Non food & other food -0.01 0.01 0.00 0.00 0.00 () Flud mlk 1.14-1.10-0.05 0.0-0.0 (3) Cheese 1.6-0.54-1.33-0.04 0.65 (4) Powdered mlk 0.6 0.7-0.05-1.54 0.71 (5) Butter 0.95-0.3 1.08 1.01 -.7 Mean share 0.990 0.008 0.001 0.001 0.000 1.b. Semflexble Almost Ideal Demand System (curvature mposed): Non-food and other food, flud mlk, cheese, powdered mlk and butter -Rank 4 model The SAI model has the same structure, varables etc. as the AI model. Table B-4. Parameter estmates of the SAI model (rank 4) wth four dary products and an all-other goods aggregate Number of observatons = 41 Trace of Matrx = 70.6104 Parameter Estmate Std. Error t-statstc P-value A1.98971.68440E-03 3686.90 [.000] A.838118E-0.0990E-03 39.991 [.000] A3.804481E-03.414775E-04 19.3956 [.000] A4.66945E-03.498870E-04 13.4188 [.000] B1.1768E-0.59571E-0.854365 [.393] B -.16494E-0.0768E-0 -.795703 [.46] B3 -.138504E-03.381938E-03 -.36636 [.717] B4.163188E-03.415307E-03.39934 [.694] T11 -.11139.01910-5.880 [.000] T14.606434E-0.56040E-0 1.0811 [.79] T13.0147.396384E-0 3.58917 [.000] T1.08896.0157 5.65611 [.000] D1 -.8790.797199-3.61164 [.000] E1.038896.01988 1.96171 [.050] F1.597470E-03.175596E-03 3.405 [.001] L1.135645E-0.37186E-03 3.64807 [.000] T.035896.674179E-0 5.3440 [.000] T4 -.01648.857869E-0-1.9131 [.055] T3 -.03609.33168E-0-7.10763 [.000] D.05937.6356 3.5561 [.001] E -.08361.016495-1.71939 [.086] F -.4848E-03.13855E-03-3.0918 [.00] L -.10164E-0.95776E-03-3.43643 [.001] T33.016599.609445E-0.7367 [.006] T34 -.03435.01534-1.8697 [.06] D3.37798.10098 3.14160 [.00] E3 -.561899E-0.317470E-0-1.76993 [.077]

34 /Schluep Campo and Beghn F3 -.773316E-04.60896E-04 -.96407 [.003] L3 -.16318E-03.555086E-04 -.93879 [.003] D4.316880.135311.34187 [.019] E4 -.84635E-0.395368E-0 -.71994 [.47] F4 -.575858E-04.81435E-04 -.04615 [.041] L4 -.14100E-03.596853E-04 -.364 [.018] Equaton: EQ1: Non food and other food Dependent varable: W1 Mean of dep. var. =.99011 Std. dev. of dep. var. =.331734E-0 Sum of squared resduals =.10400E-04 Varance of resduals =.53664E-06 Std. error of regresson =.503651E-03 R-squared =.976373 LM het. test = 7.93117 [.005] Durbn-Watson = 1.13166 Equaton: EQ: Flud mlk Dependent varable: W Mean of dep. var. =.80891E-0 Std. dev. of dep. var. =.5980E-0 Sum of squared resduals =.70869E-05 Varance of resduals =.171431E-06 Std. error of regresson =.414043E-03 R-squared =.97386 LM het. test = 8.10610 [.004] Durbn-Watson = 1.17188 Equaton: EQ3: Cheese Dependent varable: W3: cheese Mean of dep. var. =.7054E-03 Std. dev. of dep. var. =.93670E-04 Sum of squared resduals =.18030E-06 Varance of resduals =.443976E-08 Std. error of regresson =.666315E-04 R-squared =.480875 LM het. test = 4.00548 [.045] Durbn-Watson =.879594 Equaton: EQ4: Powdered mlk Dependent varable: W4: powdered mlk Mean of dep. var. =.671113E-03 Std. dev. of dep. var. =.4966E-03 Sum of squared resduals =.191137E-06 Varance of resduals =.466188E-08 Std. error of regresson =.68780E-04 R-squared =.974116

Dary Food Consumpton, Producton, and Polcy n Japan / 35 LM het. test = 4.51476 [.034] Durbn-Watson = 1.078 Table B-5. Egenvalues of the Slutsky matrx at the mean pont, rank 4 SAI model SAI models of rank Unrestrcted AI model 1 3 4 (1) Non food & other food 0-1.48641D-08 () Flud mlk 0-0.00091330 (3) Cheese -0.0008708-0.0010593 (4) Powdered mlk -0.001789-0.0018534 (5) Butter -0.0095-0.019950 Table B-6. Marshallan elastctes at the mean pont, rank 4 SAI model Elastcty of Wth respect to p nfof p fm p c p pm p b expendture (1) Non food & other food -1.00 0.00 0.00 0.00 0.00 1.00 () Flud mlk 0.39-1.10-0.05 0.01-0.04 0.80 (3) Cheese 1.15-0.53-1.9-0.11-0.06 0.83 (4) Powdered mlk -0. 0.07-0.13-1.8 0.3 1.4 (5) Butter 0.91-0.78-0.10 0.50-0.16-0.37 Mean share 0.990 0.008 0.001 0.001 0.000 Table B-7. Hcksan elastctes at the mean pont, rank 4 SAI model Elastcty of Wth respect to p nfof p fm p c p pm p b (1) Non food & other food -0.01 0.01 0.00 0.00 0.00 () Flud mlk 1.18-1.10-0.05 0.01-0.04 (3) Cheese 1.97-0.5-1.9-0.11-0.06 (4) Powdered mlk 1.01 0.08-0.13-1.8 0.3 (5) Butter 0.54-0.78-0.10 0.50-0.16 Mean share 0.990 0.008 0.001 0.001 0.000

36 /Schluep Campo and Beghn. A subsystem of fve goods (the four dary goods and an all-other food aggregate).a. Unrestrcted Lnear Almost Ideal Demand System: Other food, flud mlk, cheese, powdered mlk, and butter w w w w 1 3 4 The lnear AI conssts of fve equatons; however, because of sngularty of the matrx, one equaton s omtted. The expendture share (w ) depends on the own prce and the prces of the other goods, a tme trend (tr), the percentage of females partcpatng n the labor force (r), the populaton densty (km), the dependency rato measure for the agng populaton (ku), and on total expendtures that are dvded by the Stone prce ndex (x / PP): x = α 1 + d 1tr + e1r + f1km + l1ku + c11 log p1 + c1 log p + c13 p 3 + c14 p 4 + β 1 log ; PP x = α + d tr + e r + f km + l ku + c1 log p1 + c log p + c 3 p 3 + c 4 p 4 + β log ; PP x = α 3 + d 3tr + e 3r + f 3km + l3ku + c13 log p1 + c 3 log p + c 33 p 3 + c 34 p 4 + β 3 log ; PP x = α 4 + d 4tr + e 4 r + f 4 km + l 4 ku + c14 log p1 + c 4 log p + c 34 p 3 + c 44 p 4 + β 4 log ; PP where: w = expendture share of category, w 1 = other food w = flud mlk, w 3 = cheese, w 4 = powdered mlk, w 5 = butter, Because of sngularty of the matrx, equaton 5 s omtted x = total expendture PP = lnear Stone prce ndex, tr = tme trend, r = percentage of females partcpatng n the labor force, km = populaton densty, ku = dependency rato, p = prce ratos (p 1 /p 5, p /p 5, p 3 /p 5 and p 4 /p 5 ), α, β, d, e, f, l, and the c j are parameter vectors that have to be estmated. Table B-8. Parameter estmates of the lnear AI model wth four dary products and an all-other food aggregate Number of observatons=41 log lkelhood=1178.34 Schwarz B.I.C.=-1091.64 Parameter Estmate std Error t-statstc P-value A1.967850.511667E-03 1891.56 [.000] A.06371.417515E-03 63.1611 [.000] A3.51611E-0.734994E-04 34.331 [.000] A4.193465E-0.704341E-04 7.4676 [.000]

Dary Food Consumpton, Producton, and Polcy n Japan / 37 B1 -.0156.86876E-0-1.7987 [.07] B.011607.715901E-0 1.613 [.105] B3.5598E-0.118460E-0 1.9044 [.057] B4.500164E-0.111916E-0 4.46909 [.000] C11 -.0135.953765E-0 -.3079 [.00] C1.016658.78095E-0.1989 [.033] C13.389866E-0.19585E-0 3.00857 [.003] C14.40608E-0.1090E-0 3.3587 [.001] D1-6.53640 1.4803-4.41580 [.000] E1.144435.034637 4.1700 [.000] F1.1518E-0.97438E-03 5.08615 [.000] L1.85895E-0.71870E-03 3.97783 [.000] C -.01053.664579E-0-1.58474 [.113] C3 -.3930E-0.105674E-0-3.7107 [.000] C4 -.483E-0.10565E-0 -.1804 [.033] D 4.7193 1.0703 3.9103 [.000] E -.103458.0984-3.46900 [.001] F -.107915E-0.4440E-03-4.4511 [.000] L -.18404E-0.585709E-03-3.7888 [.000] C33 -.8466E-03.43910E-03-1.89985 [.057] C34 -.3379E-03.454111E-03 -.51173 [.609] D3.750443.06988 3.6554 [.000] E3 -.0630.539967E-0-4.19108 [.000] F3 -.19711E-03.411939E-04-4.67815 [.000] L3 -.55934E-03.10051E-03 -.54608 [.011] D4.655634.190609 3.43969 [.001] E4 -.01358.586107E-0 -.6199 [.04] F4 -.168006E-03.37707E-04-4.45554 [.000] L4 -.43080E-03.9185E-04 -.63687 [.008] C44 -.164731E-0.674651E-03 -.4417 [.015] Equaton: EQ1: Other food Dependent varable: W1 Mean of dep. var. =.968141 Std. dev. of dep. var. =.5106E-0 Sum of squared resduals =.695759E-04 Varance of resduals =.169697E-05 Std. error of regresson =.13068E-0 R-squared =.935936 LM het. test = 6.93873 [.008] Durbn-Watson = 1.5607 Equaton: EQ: Flud mlk Dependent varable: W Mean of dep. var. =.06103 Std. dev. of dep. var. =.394313E-0 Sum of squared resduals =.46500E-04 Varance of resduals =.11805E-05 Std. error of regresson =.10610E-0 R-squared =.95685 LM het. test = 5.86164 [.015] Durbn-Watson = 1.4098

38 /Schluep Campo and Beghn Equaton: EQ3: Cheese Dependent varable: W3 Mean of dep. var. =.45686E-0 Std. dev. of dep. var. =.5350E-03 Sum of squared resduals =.135160E-05 Varance of resduals =.39659E-07 Std. error of regresson =.181565E-03 R-squared =.887 LM het. test =.466857 [.494] Durbn-Watson =.903843 Equaton: EQ4: Powdered mlk Dependent varable: W4 Mean of dep. var. =.06878E-0 Std. dev. of dep. var. =.98100E-03 Sum of squared resduals =.113669E-05 Varance of resduals =.774E-07 Std. error of regresson =.166506E-03 R-squared =.970473 LM het. test = 4.55488 [.033] Durbn-Watson = 1.8338 Table B-9. Marshallan elastctes at the mean pont, AI model Elastcty of Wth respect to p of p fm p c p pm p b expendture (1) Other food -1.01 0.0 0.00 0.00 0.00 0.98 () Flud mlk 0.1-1.41-0.15-0.09 0.00 1.44 (3) Cheese 0.68-1.59-1.33-0.09 0.43 1.90 (4) Powdered mlk -0.40-1.3-0.13-1.86 0.03 3.59 (5) Butter 0.49 0.11 0.83 0.06-0.04-1.44 Mean share 0.968 0.06 0.003 0.00 0.001 Table B-10. Hcksan elastctes at the mean pont, AI model Elastcty of Wth respect to p of p fm p c p pm p b (1) Other food -0.06 0.04 0.01 0.01 0.00 () Flud mlk 1.60-1.37-0.15-0.08 0.00 (3) Cheese.5-1.54-1.3-0.09 0.43 (4) Powdered mlk 3.07-1.14-0.1-1.85 0.04 (5) Butter -0.90 0.07 0.8 0.05-0.04 Mean share 0.968 0.06 0.003 0.00 0.001

Dary Food Consumpton, Producton, and Polcy n Japan / 39.b. Semflexble Almost Ideal Demand System (curvature mposed): Other food, flud mlk, cheese, powdered mlk and butter -Rank 4 model The SAI model has the same structure, varables etc. as the AI model. Table B-11. Parameter estmates of the rank 4 SAI model wth four dary products and an all-other food aggregate Number of observatons = 41 Trace of Matrx = 54.3867 Parameter Estmate Std Error t-statstc P-value A1.948094.73494E-0 19.116 [.000] A.03845.61779E-0 6.19579 [.000] A3.685415E-0.145713E-0 4.70387 [.000] A4.57414E-0.1137E-0.6983 [.007] B1 -.019800.7949E-0 -.7144 [.007] B.011988.613065E-0 1.95539 [.051] B3.4354E-0.144804E-0 3.0056 [.003] B4.361434E-0.10605E-0 1.71617 [.086] T11 -.6906.06918-9.9956 [.000] T1.18646.0718 6.85181 [.000] T13.045859.9739E-0 4.71641 [.000] T14.030545.014431.11666 [.034] D1-5.3115 1.83774 -.89059 [.004] E1.114318.056669.0179 [.044] F1.130450E-0.363115E-03 3.5953 [.000] L1.19779E-0.919890E-03.38919 [.017] T.091089.0104 8.73991 [.000] T3 -.041991.010393-4.0403 [.000] T4 -.059017.016405-3.59750 [.000] D 3.48384 1.3815.54 [.01] E -.06556.045798-1.43076 [.15] F -.835366E-03.6850E-03-3.1111 [.00] L -.157583E-0.693569E-03 -.706 [.03] T33.064344.010338 6.411 [.000] T34 -.065185.0060-3.1743 [.001] D3.639101.45869 1.4113 [.158] E3 -.09007.01476 -.03187 [.04] F3 -.193614E-03.8798E-04 -.1958 [.06] L3 -.184037E-03.403E-03 -.81509 [.411] D4.765673.513373 1.49146 [.136] E4 -.38030E-0.01648 -.19903 [.84] F4 -.165833E-03.935675E-04-1.7734 [.076] L4 -.67080E-03.4347E-03-1.09798 [.7] Equaton: EQ: Other food Dependent varable: W1 Mean of dep. var. =.968141 Std. dev. of dep. var. =.5106E-0 Sum of squared resduals =.619935E-04 Varance of resduals =.15104E-05 Std. error of regresson =.1965E-0 R-squared =.94911 LM het. test = 10.3511 [.001] Durbn-Watson = 1.3614

40 /Schluep Campo and Beghn Equaton: EQ: Flud mlk Dependent varable: W Mean of dep. var. =.06103 Std. dev. of dep. var. =.394313E-0 Sum of squared resduals =.399986E-04 Varance of resduals =.975575E-06 Std. error of regresson =.98771E-03 R-squared =.935746 LM het. test = 8.95141 [.003] Durbn-Watson = 1.5345 Equaton: EQ3: Cheese Dependent varable: W3 Mean of dep. var. =.45686E-0 Std. dev. of dep. var. =.5350E-03 Sum of squared resduals =.18506E-05 Varance of resduals =.45183E-07 Std. error of regresson =.1434E-03 R-squared =.84687 LM het. test =.18634 [.70] Durbn-Watson =.939871 Equaton: EQ4 Dependent varable: W4: powdered mlk Equaton: EQ4 Dependent varable: W4 Mean of dep. var. =.06878E-0 Std. dev. of dep. var. =.98100E-03 Sum of squared resduals =.103360E-05 Varance of resduals =.5098E-07 Std. error of regresson =.158776E-03 R-squared =.973151 LM het. test = 4.41366 [.036] Durbn-Watson = 1.79447 Table B-1. Egenvalues of the Slutsky matrx at the mean pont, rank 4 SAI model SAI models of rank 1 3 4 Unrestrcted AI model (1) Other food 1.1904D-08 0.00045577 () Flud mlk -4.34400D-1 1.8643D-08 (3) Cheese -0.0081033-0.003906 (4) Powdered mlk -0.01117-0.0047578 (5) Butter -0.11197-0.088830

Dary Food Consumpton, Producton, and Polcy n Japan / 41 Table B-13. Marshallan elastctes at the mean pont, rank 4 SAI model Elastcty of Wth respect to p of p fm p c p pm p b expendture (1) Other food -1.00 0.0 0.01 0.00 0.00 0.98 () Flud mlk 0.06-1.17-0.13-0.0-0.06 1.31 (3) Cheese 0.5-0.75-1.18 0.04 0.01 1.63 (4) Powdered mlk -0.11-0.1 0.04-1.5 0.08 1.63 (5) Butter 0.78-1.97 0.06 0.41-0.13 0.86 Mean share 0.948 0.038 0.007 0.006 0.001 Table B-14. Hcksan elastctes at the mean pont, rank 4 SAI model Elastcty of Wth respect to p of p fm p c p pm p b (1) Other food -0.08 0.05 0.01 0.01 0.00 () Flud mlk 1.31-1.1-0.13-0.01-0.05 (3) Cheese 1.80-0.69-1.18 0.05 0.01 (4) Powdered mlk 1.44-0.05 0.04-1.51 0.08 (5) Butter 1.59-1.94 0.06 0.41-0.13 Mean share 0.948 0.038 0.007 0.006 0.001 3. The subsystem of the four dary products 3.a Unrestrcted Lnear Almost Ideal Demand System: Flud mlk, cheese, powdered mlk, and butter The lnear AI conssts of four equatons; however, because of sngularty of the matrx, one equaton s omtted. The expendture share (w ) depends on the own prce and the prces of the other goods, a tme trend (tr), the percentage of females partcpatng n the labor force (r), the populaton densty (km), the dependency rato measure for the agng populaton (ku), and on total expendtures that are dvded by the Stone prce ndex (x / PP):

4 /Schluep Campo and Beghn w w w 1 3 x = α 1 + d 1tr + e1r + f1km + l1ku + c11 log p1 + c1 log p + c13 p3 + β 1 log ; PP x = α + d tr + e r + f km + lku + c1 log p1 + c log p + c 3 p 3 + β log ; PP x = α 3 + d 3tr + e3r + f 3km + l3ku + c13 log p1 + c 3 log p + c33 p3 + β 3 log ; PP where: w = expendture share of category, w 1 = flud mlk, w = cheese, w 3 = powdered mlk, w 4 = butter, Because of sngularty of the matrx, equaton 4 s omtted x = total expendture PP = lnear Stone prce ndex, tr = tme trend, r = percentage of females partcpatng n the labor force, km = populaton densty, ku = dependency rato, p = prce ratos (p 1 /p 4, p /p 4, and p 3 /p 4 ), α, β, d, e, f, l, and the c j are parameter vectors that have to be estmated. Table B-15. Parameter estmates of the lnear AI model wth four dary products Number of observatons = 41 Log lkelhood = 59.40 Schwarz B.I.C. = -471.656 Parameter Estmate Std Error t-statstc P-value A1.8017.137638E-0 595.89 [.000] A.077789.91599E-03 84.993 [.000] A3.06449.13896E-0 5.001 [.000] B1 -.701966E-0.0160 -.34688 [.745] B.04194.014036.9403 [.003] B3 -.614638E-0.017883 -.343709 [.731] C11.013893.0355.589899 [.555] C1 -.038334.014653 -.6161 [.009] C13.0460.018681.65 [.04] D1-16.5803 7.1337 -.3759 [.00] E1.187788.17985.86147 [.389] F1.34433E-0.833510E-03 4.13100 [.000] L1.66467E-0.345967E-0.77010 [.441] C -.363939E-0.015676 -.3157 [.816] C3.07191.016746 1.6370 [.104] D -3.3710 4.64435 -.716376 [.474] E -.33964.13665-1.71697 [.086] F.7194E-03.550476E-03.493980 [.61] L.394404E-0.695E-0 1.7488 [.081] C33 -.093961.07395-3.498 [.001] D3 18.4919 5.89377 3.13754 [.00] E3.067901.178788.379784 [.704] F3 -.3186E-0.689868E-03-4.5675 [.000] L3 -.657594E-0.8379E-0 -.3136 [.00]

Dary Food Consumpton, Producton, and Polcy n Japan / 43 Equaton: EQ1: Flud mlk Dependent varable: W1 Std. dev. of dep. var. =.01980 Sum of squared resduals =.154004E-0 Varance of resduals =.37560E-04 Std. error of regresson =.61878E-0 R-squared =.90161 LM het. test = 1.95588 [.16] Durbn-Watson =.94451 Equaton: EQ: Cheese Dependent varable: W Mean of dep. var. =.08058 Std. dev. of dep. var. =.05445 Sum of squared resduals =.657917E-03 Varance of resduals =.160468E-04 Std. error of regresson =.400584E-0 R-squared =.974604 LM het. test = 4.14491 [.04] Durbn-Watson = 1.0674 Equaton: EQ3: Powdered mlk Dependent varable: W3 Mean of dep. var. =.45686E-0 Mean of dep. var. =.06177 Std. dev. of dep. var. =.019160 Sum of squared resduals =.1058E-0 Varance of resduals =.49410E-04 Std. error of regresson =.499410E-0 R-squared =.930403 LM het. test = 3.6811 [.057] Durbn-Watson = 1.1665 Table B-16. Marshallan elastctes at the mean pont, AI model Elastcty of Wth respect to p fm p c p pm p b expendture (1) Flud mlk -0.98-0.05 0.05-0.0 0.99 () Cheese -0.93-1.09 0.3 0.17 1.53 (3) Powdered mlk 0.73 0.43 -.45 0.38 0.9 (4) Butter 0.14 0.45 0.70-1.54 0.5 Mean share 0.80 0.078 0.064 0.038

44 /Schluep Campo and Beghn Table B-17. Hcksan elastctes at the mean pont, AI model Elastcty of Wth respect to the prce p fm p c p pm p b (1) Flud mlk -0.16 0.03 0.1 0.0 () Cheese 0.33-0.97 0.41 0.3 (3) Powdered mlk 1.48 0.50 -.39 0.4 (4) Butter 0.35 0.47 0.7-1.53 3.b Semflexble Almost Ideal Demand System (curvature mposed): Flud mlk, cheese, powdered mlk and butter Full rank model The SAI model has the same structure, varables etc. as the AI model. Table B-18. Parameter estmates of the full rank SAI model wth four dary products Number of observatons = 41 Trace of Matrx = 44.0347 Standard Parameter Estmate Error t-statstc P-value A1.81961.34610E-0 36.711 [.000] A.077894.187995E-0 41.434 [.000] A3.06511.1148E-0 30.7883 [.000] B1 -.115598E-0.056653 -.00404 [.984] B.0445.03008 1.40434 [.160] B3.10994E-0.08956.07868 [.94] T11.399559.077070 5.18440 [.000] T13 -.54703.048416-5.6071 [.000] T1 -.093005.068763-1.3555 [.176] D1-18.091 18.6488 -.966770 [.334] E1.035897.568873.063103 [.950] F1.345317E-0.17814E-0 1.58538 [.113] L1.9689E-0.91448E-0.34015 [.746] T -.4349.05815-4.1863 [.000] T3.8861.061790 4.67100 [.000] D -4.94017 10.014 -.493318 [.6] E -.19044.96439 -.64433 [.51] F.576547E-03.117896E-0.489030 [.65] L.448970E-0.487911E-0.90189 [.357] T33.10549.1556.816958 [.414] D3 17.614 9.80671 1.79595 [.073] E3.051308.97164.17660 [.863] F3 -.83097E-0.11981E-0 -.50571 [.01] L3 -.605095E-0.4705E-0-1.868 [.198] Dependent varable: W1: Flud mlk Mean of dep. var. =.80877 Std. dev. of dep. var. =.01980 Sum of squared resduals =.170190E-0 Varance of resduals =.415098E-04 Std. error of regresson =.64481E-0

Dary Food Consumpton, Producton, and Polcy n Japan / 45 R-squared =.891767 LM het. test =.718934 [.396] Durbn-Watson =.9973 Equaton: EQ: Cheese Dependent varable: W Mean of dep. var. =.08058 Std. dev. of dep. var. =.05445 Sum of squared resduals =.5607E-03 Varance of resduals =.137091E-04 Std. error of regresson =.37058E-0 R-squared =.97897 LM het. test = 3.08313 [.079] Durbn-Watson = 1.19735 Equaton: EQ3: Powdered mlk Dependent varable: W3 Mean of dep. var. =.06177 Std. dev. of dep. var. =.019160 Sum of squared resduals =.10883E-0 Varance of resduals =.50934E-04 Std. error of regresson =.500933E-0 R-squared =.99980 LM het. test = 4.4691 [.035] Durbn-Watson = 1.13766 Table B-19. Egenvalues of the Slutsky matrx at the mean pont, full rank SAI model SAI models of rank 1 3 Full rank Unrestrcted AI model (1) Flud mlk -7.6074D-09-3.65456D-09 () Cheese -0.011875-0.07607 (3) Powdered mlk -0.188-0.10431 (4) Butter -0.6136-0.4055 Table B-0. Marshallan elastctes at the mean pont, full rank SAI model Elastcty of Wth respect to p fm p c p pm p b expendture (1) Flud mlk -1.01-0.03 0.06-0.01 1.00 () Cheese -0.79-0.99 0.50-0.6 1.54 (3) Powdered mlk 0.7 0.64 -.50 0.1 1.03 (4) Butter 0.67-0.41 0.8-0.40-0.14 Mean share 0.819 0.078 0.065 0.038

46 /Schluep Campo and Beghn Table B-1. Hcksan elastctes at the mean pont, full rank SAI Model Elastcty of Wth respect to the prce p fm p c p pm p b (1) Flud mlk -0.19 0.05 0.1 0.03 () Cheese 0.48-0.87 0.60-0.0 (3) Powdered mlk 1.56 0.7 -.44 0.16 (4) Butter 0.55-0.4 0.7-0.40

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