The Impact of Low Oil Prices on Japan’s Economy, Oil Demand, and Policy

The recent lower oil prices will have limited impact on Japan’s oil demand and energy policy direction. Oil demand will maintain its downward trend, due to demographic factors as well as improving fuel efficiency. Even before the Fukushima incident, the government already had developed a firm plan to reduce the country’s dependence on oil. In fact, the volatility of oil prices does not bode well for Japan’s energy security. The country’s long-term energy policy will continue to focus on nuclear energy and encourage the increasing use of nuclear energy as well as renewables to mitigate climate change and move away from oil. The government also wants to reduce Japan’s dependence on liquefied natural gas (LNG), which accounts for nearly 50% of the total power-generation mix despite the fact that LNG is not defined as a base-load fuel.

The Economic Impact of Lower Oil Prices

Recent lower oil prices, together with the depreciation of the Japanese yen, are expected to help increase Japan’s GDP growth by a range of 0.8%–1.0% annually. In fiscal year (FY) 2014, GDP growth was negative (-0.5%) mainly because of the adverse impact on consumer spending of the consumption tax increase from 5% to 8% (implemented in April 2014). However, the Japanese Cabinet Office forecasts GDP growth to be 1.5% in FY2015. [1] It also forecasts that the trade deficit will halve in 2015, primarily because of low oil and LNG prices, although this trend will be partly offset by a weak yen.

The key factor for sustainable economic recovery, however, is stimulating consumer spending, which accounts for 60% of GDP. To achieve this goal, an increase in individual income is necessary. Although large corporations have mostly announced that they will increase salaries and wages this year, this policy has not yet been adopted by small- and medium-sized companies, which employ almost 70% of the total workforce.

The Effects of Lower Oil Prices on Oil Demand

Lower oil prices, meanwhile, have not yet stimulated Japanese oil demand. Despite pump prices plunging by 25% for the July 2014–January 2015 period, gasoline sales have not increased. FACTS Global Energy (FGE) forecasts gasoline demand to improve only slightly this year, after having declined by a sharp 3% in 2014. [2] Believing that their income will not increase anytime soon, consumers remain cautious about spending and continue to drive less.

In the long term, Japan’s oil demand will maintain its downward trend, even if macroeconomic issues improve, due to demographic factors (in particular, Japan’s aging and shrinking population) as well as improving fuel efficiency. Furthermore, post-Fukushima power saving and energy conservation have become a habit for consumers.

Japan’s Energy Policies

In terms of Japan’s energy policy, the government wants to reintroduce nuclear power with appropriate safety assurances for the long term. Despite the Fukushima crisis, nuclear power still offers an attractive source of base-load power generation in terms of reducing carbon emissions and fuel imports. Furthermore, both employment and local infrastructure relating to the nuclear power industry play an important role in Japan’s economic activities.

Despite the government’s long-term policy targets for nuclear energy, none of Japan’s 48 nuclear reactors is operating today. Consequently, LNG accounts for nearly 50% of the total power-generation mix. [3]The Ministry of Economy, Trade and Industry (METI) considers this to be a serious problem, as it does not define LNG as a base-load fuel, and it has encouraged Japanese utilities to reduce their LNG consumption. METI defines nuclear, coal, and hydro as Japan’s long-term sources of base-load generation, LNG as a middle-load fuel, and oil as a peak-load fuel. In its draft target for the power-generation mix in 2030, the government allocated 20%–22% for nuclear energy. The Abe administration’s energy policy clearly defines nuclear energy as a base-load capacity.

In many ways, security and conservation are the two key issues surrounding Japan’s energy security situation. The government’s energy policy emphasizes that the country needs to diversify energy sources for greater supply security, while the core will continue to rely on nuclear energy. It encourages the increasing use of renewables to mitigate climate change and move away from oil. Even before the Fukushima incident, the government already had developed a firm plan to reduce the country’s dependence on oil.

In conclusion, FGE Japan does not believe that low oil prices will affect Japan’s oil demand and energy policy significantly. Instead, the country’s long-term energy policy will continue to focus on nuclear as the source of base-load generation until at least 2030.

Endnotes

[1] For details about Japan’s GDP, see the Cabinet Office website, http://www.cao.go.jp/index.html.

[2] For details about Japan’s oil demand forecast, see FGE, Oil Databooks, Spring 2015.

[3] See Takayuki Sumita, “Japan’s Views on Future LNG Market” (presentation at the LNGA Conference, Singapore, March 3, 2015).

Tomoko Hosoe is Managing Director at FGE Japan. Osamu Fujisawa is a Senior Associate at FGE Japan.