Japan releases some of its emergency rice stockpile

The New Zealand Herald reported last week:

The Japanese Government said on Friday it will release a fifth of its emergency rice stockpile after hot weather, poor harvests and panic-buying over a “megaquake” warning nearly doubled prices over a year...

Rice prices had already began to change consumption patterns for some like Tokyo resident Eriko Kato.

“I still do buy rice occasionally, but since it’s so expensive I sometimes give up on buying it once I see the price,” Kato, 41, told AFP...

Tokyo resident Kato says she “sometimes just switches to noodles like udon or soba instead” because rice is more expensive.

The changes in the market for rice in Japan are illustrated in the diagram below. Before the poor rice harvest and panic-buying, the market was in equilibrium with a price of P0, and Q0 rice being traded. The poor rice harvest decreases the supply of rice from S0 to S1, while panic-buying increases the demand for rice from D0 to D1. The combined effect of these two changes is an increase in the price of rice (from P0 to P1). The change in the equilibrium quantity of rice traded is ambiguous - it depends on the relative size of the shifts in supply and demand. On the diagram below, the equilibrium quantity remains at Q0. However, if the increase in demand had been larger than the decrease in supply, then the equilibrium quantity traded would have increased. And if the increase in demand had been smaller than the decrease in supply, then the equilibrium quantity traded would have decreased. So, the model only tells us that we can be sure that the price of rice will go up.

If the Japanese government releases some of its emergency rice stockpile, then that will increase the supply of rice in the market. Let's assume that the increase in supply shifts the supply curve back from S1 to S0. The result is a decrease in the equilibrium price of rice (to P2), and an increase the equilibrium quantity of rice traded (to Q2). Notice though that the price of rice hasn't fallen all the way back to the initial equilibrium price. The Japanese government would have to release a lot of its emergency rice supply for that to happen. Or, the panic-buying of rice would have to subside (which is probably what the government is hoping will happen when it releases the emergency rice).

In the meantime though, the changes in the rice market will affect other markets. Consider the market for noodles, shown below. Rice and noodles are substitutes. When the price of rice increases, some consumers will switch to buying noodles (as described in the quote from the Herald article at the start of this post). The noodle market was previously in equilibrium with an equilibrium price of P0, and an equilibrium quantity of Q0 noodles traded. Consumers switching from rice to noodles increases the demand for noodles (from D0 to D1). This increases the equilibrium price of noodles (from P0 to P1), and increases the equilibrium quantity of noodles traded (from Q0 to Q1).

So, higher rice prices affect Japanese consumers, regardless of whether they are buying rice or noodles! Fortunately, the release of the emergency rice, lowering the equilibrium price of rice, will likely also lessen the demand for noodles and lower the price of noodles as well.