Japan: Impact of Oil Price Falls
Published 9 December 2014
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This article is no longer current. Please refer to Overseas Business Risk – Japan
Summary
Recent falls in the oil price should benefit Japan’s economy overall, given its high level of imports. The trade deficit, in particular, should benefit – albeit with a significant time lag. But the fall risks making it harder for the Bank of Japan to hit its inflation targets, and could slow down investment in renewable energy.
Detail
Japan imported USD 150 bn in oil last year, and USD 73 bn of LNG primarily through contracts indexed on the oil price. Recent dramatic falls in the oil price will therefore be welcome here, and the Japanese economy should receive a significant boost. But it is not all good news.
A key question will be the impact on Japan’s rising trade deficit. This stood at USD6.8bn in October, and was the highest on record last year at JPY11.5tn (USD120bn). An important driver has been the cost of oil and gas (34% of all imports) while Japanese nuclear reactors remain shut down following the Fukushima disaster. Lower oil prices in yen terms should impact on these figures. Yet utilities’ contracts tend to be long-term, so the immediate impact will be limited – although gasoline prices are already at their lowest in a year. The lower oil price will also be offset by the weaker yen, albeit only partially: since the end of September, the yen has fallen by 8% against the dollar while Dubai crude oil prices have plunged by 25%.
The fall also poses the Bank of Japan challenges. Governor Kuroda is committed to achieving 2% inflation in the course of next year. The Bank’s latest burst of quantitative easing was designed to keep this on track and counter recent falls in inflation to 0.9%. The fall in the oil price will have a significant disinflationary impact, which is currently estimated at -0.4% on CPI. This will make it harder to ensure that Japan’s war on deflation is won. The next Spring wage round therefore becomes even more important: if Japan’s major companies do not boost wages, inflationary expectations are unlikely to build.
The price falls should nonetheless help Japan’s energy companies. These are still suffering from the closure of Japan’s nuclear reactors, and have been unable to pass on the full cost of oil/gas imports to consumers. Price falls – even if their impact is delayed – should provide some much needed relief to their balance sheets. And they will also help in the negotiation of future long-term LNG contracts based on the oil price.
The fall in the oil price is not expected to fundamentally change the pressure from industry for nuclear restarts, which are expectedto begin early next year. This is partly because most of the nuclear capacity has been replaced by LNG. The considerable sunken costs involved mean that there are still strong economic arguments for restarts, and they should also boost Japan’s energy security. But if sustained, cheaper oil and gas could impacton any discussions around building of new nuclear reactors in due course and investment in renewable energy.
An interesting question in Japan – in line with recent IEA analysis – will be the impact of cheaper oil on investment in shale oil and gas development. Japan is working hard to diversify its sources of LNG, and is particularly interested in potential for greater supply from the US. If a prolonged drop in the oil price ends up making investment in shale oil and gas less viable, it could make alternativesmore attractive.
Disclaimer
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