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Global Risk Insights

Global Risk Insights

GlobalRiskInsights.com provides the web’s best political risk analysis for businesses and investors. Our contributors are some of the brightest minds in economics, politics, finance, and…

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Fukushima Amplifies Japanese Energy Import Dependence

When Typhoon Wipha flooded Japan with heavy rains last week, the operator of the Fukushima nuclear power plant ordered precautionary measures to prevent leakage of contaminated water. Ever since the March 2011 earthquake and tsunami caused a reactor meltdown at the plant, Fukushima has become a symbol of a Japanese nuclear strategy and energy supply in disarray. As the clean-up from the disaster continues, all fifty of Japan’s nuclear reactors have been taken offline, creating a large shortfall in energy production that Japan has had to fill from abroad.

Growing dependence on imports

According to the U.S. Energy Information Administration (EIA), Japan falls far short of providing enough energy for its domestic uses, with only 16% domestic energy production. Not surprisingly, Japan needs to import heavily — it is the world largest importer of liquefied natural gas (LNG). Before the disaster at Fukushima and the following reevaluation of nuclear power in Japan, nuclear sources supplied 13% of Japan’s energy consumption. The EIA notes in another report that “Japan’s electric power utilities have been consuming more natural gas and petroleum to make up for the shortfall in nuclear output…” With this shift, fossil fuel use has jumped 21% in 2012 compared to 2011 levels.

Related article: Russia to Focus on LNG in Effort to Reduce Dependence on European Market

High energy costs in the near term (the IMF forecasts that the spot price for crude will remain above $100/barrel for 2014) pose a problem for Japan’s trade balance. As Japan imports more fossil fuels, its trade deficit widens (Japan ran a surplus before 2011). This hurts its current account, which has shrunk considerably. While the depreciation of the yen would usually helps by making exports competitive, the IMF’s Article 4 consultation with Japan noted that the weaker yen has yet to improve the current account.

Between a rock and a hard place politically

The higher energy costs in Japan have not, however, turned consumer opinion back in favor of nuclear power. According to a recent poll, 31% of 1,085 Japanese citizens surveyed said they had not felt any pinch from higher utility bills, and 41% said they felt the effect “a little.” This poses a political challenge for Japan. Japan’s leaders would undoubtedly prefer to be able to rely on domestic nuclear energy production, but restarting nuclear reactors with Fukushima continuing to make headlines is political poison.

That leads to a muddled energy strategy. Former Prime Minister Naoto Kan made a promise to end the use of nuclear power in Japan, but his successor (Yoshihiko Noda) ungracefully retreated from a 2040 goal of phasing out all nuclear power. The current Japanese government finds itself caught between businesses who favor nuclear energy production and citizens who still doubt those reactors can be overseen responsibly. For example, a legal claim filed recently appealed the decision not to indict the former heads of Tokyo Electric Power (which oversaw Fukushima). Furthermore, Junichiro Koizumi, a former prime minister and a political heavyweight, recently declared he had changed his stance on the nuclear issue and now opposes atomic power plants.

Related article: Japan Plans Radical Overhaul of Nuclear Industry

Energy costs have also intertwined themselves with “Abenomics,” Prime Minister Shinz? Abe’s new stimulus plan. Ending Japan’s dogged deflation is a primary goal, and the economy shows signs of inflation picking up. However, as covered previously on GRI, much of that inflation has to do with the higher energy costs that have come with increased imports. While Abe is eager to claim that inflation as a success, it needs to be broad-based in a way that can contribute to wage growth and boost the economy further.

Bloomberg’s editorial board recently urged the government to better manage the Fukushima issue to rehabilitate the image of nuclear power in Japan. They also noted that restarting reactors would be critical to Abe’s economic plan. While all the reactors do not need to be brought on at once, Japan’s government needs to build a credible strategy, which instills confidence in the Japanese public. The public needs to be reassured that the government can properly regulate and ensure the safety of nuclear power plants. With a stronger domestic energy supply, utility costs for businesses and consumers would hopefully decline and Japan’s economic fundamentals might improve to help further growth.

By Ned Pagliarulo




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