#75 Japan Forced to Rethink Its Energy Policy

The red hot Indian and particularly Chinese economies are unquestionably having a major impact on the world. While discussions often rage about whether or not this is a good thing (e.g. with environmentalists pointing out the devastating effect this is having on the environment and business leaders arguing it provides for opportunities not seen in decades), there are a myriad of micro areas where the effect of their growth is clear for all to see. One such interesting area is in Japan's energy policy.

For centuries Japan has been the largest economy in Asia, as well as the dominant political player (this has more to do with their financial muscle than with actual influence exerted). Subsequently, the country experienced a hunger for natural energy resources such as gas and oil that far surpassed that of any of its neighbors. With the rapid growth of India and China, this is beginning to change. While, according to the CIA World Factbook, Japan is still the world's second largest (after the USA) importer of oil with 5.43 million barrels of oil per day, China follows closely with 3.18 million and India with 2.01 million. More interestingly, China already consumes more oil than Japan, with China's consumption standing at 6.53 million barrels per day, Japan's at 5.6 million and India's at 2.5 million (the USA is still the world's largest consumer of oil). This means an increasingly larger portion of China's oil has to come from abroad, which directly and adversely affects Japan's supply. Given the fact that Japan's demand for oil has remained and, according to projections, will continue to remain steady for the coming years, the country is justifiably worried that it is no longer as interesting a market as the rapidly growing Chinese and Indian ones are for petroleum exporting countries.

Japan imports a whopping 90% of its oil from the Middle East (Saudi Arabia is Japan's largest oil supplier, shipping 458 million barrels, or 30% of Japan’s total import; UAE second with 387 million, or 25.4%; Iran third with 176 million, or 11.5%; and Qatar fourth with 156 million, or 10.2%). Japan - the world's largest importer of liquefied natural gas (LNG) - is similarly dependent on one geographical location for its gas imports (three quarters of Japan's imports come from Australasia: Indonesia, Malaysia, Brunei Darussalam and Australia. Qatar is Japan's fourth largest supplier after Indonesia, Malaysia and Australia).

In the meanwhile, China and India have been scavenging the world - particularly Africa - for new areas from which to secure their oil supply. China has been so successful in Africa that it has even managed to create a very balanced oil importing picture (in 2006, the Middle East accounted for 45% of China's crude oil imports, Africa for 32%, the EU and the Americas for 18.3% and Asia Pacific for 4%, according to the Chinese General Administration of Customs). All the while the oil prices have been skyrocketing, allowing for countries like Russia and Venezuela to play their oil cards and flex their muscles.

Given all these worrisome facts, the Japanese government decided it was time to prioritize the securing of the country's energy supply. In May 2006, the Japanese Ministry of Economy, Trade and Industry (METI) published a revealing document entitled "The New Energy Strategy." In it (and in later documents and high level speeches even more so), we find some key shifts away from their old policy. As Jan-Hein Chrisstoffels, a Japan specialist at the Netherlands Institute of International Relations Clingendael, points out, the formerly abundant references to liberalization, globalization and the free market are nowhere to be found. The new pillars are: Strengthening of bilateral relations with oil and gas producing countries; Increasing imports from oil and gas projects that are led by Japanese firms abroad; Decreasing the use of oil in the transport sector; Using more nuclear energy; And cooperation with China in the field of energy.

Another major shift in policy is the increased role that the Japanese government seeks to play. Japan feels Chinese oil firms have an unfair advantage given a government that pumps money into seemingly economically unprofitable extraction projects simply in order to secure supply. Therefore, the Japanese government has now set out to increase subsidies to Japanese oil firms and provide more favorable loans and investment guarantees. In other words, there is to be little left of the free market policies and non interference from the government that took the overtone until now. Much like China - which woos potential oil suppliers by promising preferential loans, the building of large infrastructure projects and a policy of non-interference in internal affairs - Japan has embarked upon a quest of securing her energy supply through tit-for-tat policies. One success story can already be found in former Prime Minister Junichiro Koizumi's visit to Kazakhstan in August 2006, followed by Economy, Trade and Industry Minister Amari Akira's visit this year. They ensured that Kazakhstan's (which has the world's second-largest uranium reserves after Australia) current supplies of only 1% of Japan's uranium imports will jump to 30-40% in the near future, in exchange for Japanese expertise in uranium enrichment.

It appears India and especially China are having a major impact on the policies of other nations such as Japan, which in this case can be considered as a blow to proponents of the free market. It is even likely to extend beyond the oil and gas sectors, as this year China - the world's largest consumer of coal - for the first time became a net importer thereof. The country imported 4.7 million metric tons of coal in January, a rise of 81.1% from a year ago, according to figures from the customs bureau. Although Japan is not at all a major consumer of coal, it might very well affect other formerly free market adhering countries.