This article represents an econometric assessment of the role that deficiency payments have played in developing the Japanese fluid and manufacturing milk markets and the potential effects of reducing deficiency payments on these milk markets. Principal findings are: (a) an historical simulation of the model without deficiency payments and import quotas indicates that these measures have reduced the variation in milk prices that would have otherwise occurred under this model, and price supports through these measures have resulted in greater milk production than would have accrued without price supports; and (b) a reduction in deficiency payments beginning in 1998 results in a decrease in milk prices and manufacturing milk supply and an increase in fluid milk supply and dairy imports, but fluid milk prices soon stop declining. The policy implications of such a decline in deficiency payments are discussed.