This paper discusses why progress in farmland liquidation through leasing has been very slow in the agricultural sector in Japan, focusing on the transaction costs related to farmland leasing. First, this paper points out that transaction costs are an important constraint for farmland leasing, 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 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 leasing is affected by the characteristics of farmland and local communities. The data used in the analysis is the prefectural panel data of 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 leasing 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.
