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This paper discusses why progress in farmland liquidization through leasing has been very slow in the agricultural sector in Japan, focusing on the transaction costs related to farmland lease. First, this paper points out that transaction costs are an important constraint for farmland lease, and argues by means of a survey of related studies, why transaction costs have a strong association with farmland. Next, it explores using partial equilibrium analysis to determine how the aggregated demand and supply of farmland is affected by the changes in the farmers’ activities that face a transaction cost. Following this, the paper estimates the extent to which farmland lease is affected by the characteristics of the farmland and local communities. The data used in the analysis is the prefectural panel data from the agricultural census for the years 1980, 1990, and 2000; the data excludes Hokkaido, Tokyo, Kanagawa, Osaka, and Okinawa. The result of the econometric analysis shows that the level of farmland lease is related to the variables representing the activities of local communities and the characteristics of farmland such as land improvement and conversion of farmland. These results emphasize the importance of developing and reinforcing institutions and organizations to lower the transaction costs in the farmland market.


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