We examine the effect of direct payments in less favored areas (LFAs) on agricultural land use and farm numbers in Japan, using large panel data at the community level from the Census of Agriculture in 2000 and 2005. These direct payments, which take a unique form in Japan, are made to rural communities with specific natural handicaps and that are designated as less favored, as compensation for the additional costs of agricultural production in LFAs. This study uses the location of a community (whether a community with specific natural handicaps is located in LFA) as an instrument for the community s receipt of direct payments. Our instrumental variable estimates indicate that from 2000 to 2005, LFA payments fostered continued land use and prevented farmland abandonment through the maintenance of farm households. In other words, LFA payments helped make farming in these areas viable. Acknowledgement :