Energy shortfall reshapes Japan’s foreign policy

Japan US Abe Obama

Since the Fukushima disaster, Japan has been forced to import much of its energy. This has created significant geo-political and economic risks and has reshaped its foreign policy.

In June, Toshikazu Okuya, Director of Japan’s Energy Supply and Demand Office, presented Japan’s fourth strategic energy plan. The plan details policy options for addressing Japan’s future energy needs, which have shifted dramatically since the Fukushima disaster and the shutdown of Japan’s nuclear reactors.

Without nuclear power generation, Japan now imports the most liquid natural gas (LNG) in the world, and the third most crude oil behind the China and the US. Out of the 34 countries in the OECD, Japan ranks second to last in energy self-sufficiency. Japan’s precarious energy security makes Japan more vulnerable to price shocks and to geo-political tensions along its supply routes. These risks boost Japan’s eagerness to diversify its supply and bolster its security arrangements with the US.

Geographic Exposure

The strategic plan quickly points out the fundamental challenge facing Japan: “It would be difficult for the country to secure [energy] resources autonomously if an energy supply problem should occur abroad.”

Japan imports 83% of its oil and 30% of its LNG from the Middle East. Saudi Arabia (33% of oil imports) and Qatar (18% of LNG and 11% of oil) are the two biggest sources of supply in that region, meaning tensions around the Straits of Hormuz greatly concern Japan. The sea lanes in the South China Sea and the Straits of Malacca are choke points for LNG shipped to Japan as well, with nearly a third of its LNG coming from Southeast Asia.

Pushing Japan and the US closer

After President Obama concluded his recent trip to Japan, the US and Japan released a joint statement that put open seas and freedom of navigation at the top of the agenda. With China asserting its claims more aggressively in the South and East China Seas, the US and Japan called for “an early establishment of an effective code of conduct” for interactions between navies and commercial shipping.

Additionally, the energy plan views strengthening US-Japan security cooperation as a principal means of ensuring safe commercial navigation. With energy imports representing a key vulnerability, Japan wants to bolster the consensus governing international waters.

However, Prime Minister Abe also hopes to reinterpret Japan’s constitution to allow collective self-defense with its allies (principally the US). This would add some military bite to Japan’s commitment to open seas, as Japan could come to the aid of an ally even if not directly threatened.

Given that so much of Japan’s energy imports pass through constricted and exposed sea-lanes, Japan eagerly wants to open supply routes for LNG from North America. Two Japanese energy companies have signed agreements to import 100 billion cubic feet per year (bcf/y) from the U.S. Freeport LNG terminal, beginning in 2017. Mitsubishi and Mitsui, two Japanese giants, have a stake in another LNG project in the Gulf of Mexico for 384 bcf/y starting in 2017. This will greatly ease Japan’s burden as US LNG prices are much cheaper than those in Asia.

Economic Vulnerabilities.

Japan’s trade balance turned negative in 2011 for the first time in 31 years, driven principally by the increase in energy imports. On top of that, Abe’s push to jumpstart the economy through fiscal stimulus and aggressive monetary policy led to the yen depreciating significantly.

Both factors make energy imports more costly. And Japan’s households now face roughly 20% higher energy costs. Coupled with the hike in the national consumption tax to 8%, this cuts into families’ budgets. Abe hopes to get both consumers to spend and invest to spur economic growth. If energy costs crimp disposable incomes, that goal could be threatened.

Although re-starting Japan’s nuclear reactors is politically toxic given the continuing scandal surrounding the Fukushima clean-up, 18 reactors are under review to be restarted pending safety evaluations. Getting some of the nuclear power online again would potentially ease costs for firms and households.

While Japan has never been energy independent, it typically has had a self-sufficiency rate three times its current level. The energy plan identifies the period of 2018-2020 as key to Japan’s energy future.

Over those three years, shale gas will hopefully be flowing from North America over secure Pacific sea-lanes, and the domestic energy sector will see much needed reforms. Until then, however Japan’s energy insecurity will continue to influence how it behaves internationally.

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Categories: Natural resources, Pacific Asia

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