Japan: Soaring energy costs have re-exposed Japan’s weakness as a nation of limited natural resources

One year after Russia invaded Ukraine, inflationary pressure continues to haunt countries such as Japan that are heavily reliant on imported goods.

Not long after Russian troops marched across the border toward Kyiv, developed nations rolled out a list of crippling sanctions against Moscow in a bid to restrict finances from being diverted to its war effort.

 
Russia responded in kind, freezing exports of oil and gas and setting in motion a chain reaction of events that still reverberates today.

The subsequent surge in global energy costs has re-exposed Japan’s weakness as a nation of limited natural resources and prompted the government to review its energy policy and possibly return to relying on a source that has largely been sitting idle for more than a decade — nuclear power.

The war in Europe has also spurred the government and domestic businesses to improve economic security in order to prepare for possible conflict in Asia, such as an invasion of Taiwan, that will likely bring far more devastating consequences.

Japan’s energy mix
In August, Prime Minister Fumio Kishida surprised the public when he instructed his Cabinet to explore the benefits of constructing new nuclear power plants.

Since the Fukushima triple meltdown crisis in March 2011, other prime ministers have tiptoed carefully around the issue of nuclear power, generally sticking to the government line of reducing reliance on it as much as possible.

Even when former Prime Minister Yoshihide Suga pledged in 2020 for the country to achieve carbon neutrality by 2050, he said the construction of new nuclear power plants was not under consideration at that time.

But with Japan now looking to increase its nuclear energy output, the nation’s nuclear watchdog also approved new rules earlier this month that will allow reactors to operate longer than the previous limit of 60 years.

“I believe the biggest change (to Japan’s energy policy in the past year) is nuclear energy,” says Ichiro Kutani, senior research fellow at the Institute of Energy Economics, Japan. “Deep down, the government must have been privately thinking that it would be better to use nuclear energy. It has been unable to express this openly since the Fukushima accident, but (the subsequent Russia-Ukraine war) has driven the government into a corner.”

Public opinion of nuclear energy appears to have changed over the past year, largely due to the rising energy costs.

According to the results of a telephone poll by Kahoku Shimpo earlier this month, 53.2% of respondents said they would support restarting a reactor at the Onagawa nuclear power plant in Miyagi Prefecture, while 46.7% were opposed.

This is the first time that the ratio of those who favor a reactor restart has topped those who oppose it. Large swaths of Miyagi Prefecture in the Tohoku region were severely damaged by the Great East Japan Earthquake and tsunami in March 2011.

The impact of the Russia-Ukraine war and a weakening yen has caused elevated commodity prices to push up Japan’s net inflation over the past year, reversing a deflationary pattern that was once entrenched in the economy.

Excluding fresh food, Japan’s consumer prices rose 4% from a year earlier in December, which was a 41-year-high, according to the internal affairs ministry. By comparison, prices rose just 0.6% in February last year.

Meanwhile, gas and electricity bills in December climbed 23.3% and 21.3% against the previous year.

Households have been struggling as a result of the higher import costs surrounding energy, with the government stepping in to provide financial support where possible. It has provided subsidies worth ¥6 trillion to oil wholesalers since January last year, as well as set aside a package worth ¥3.1 trillion for households to partially cover increases in the cost of gas and electricity.

Utility firms are also suffering from soaring costs related to energy imports. Tokyo Electric Power Company Holdings logged a net loss of ¥650.9 billion between April and December, a total larger in size than the ¥623 billion net loss the firm posted following the triple meltdowns in Fukushima in 2011.

Six leading utilities, including Tepco, have announced plans to raise electricity bills over the next few months because they have been unable to absorb the growing energy import costs.

Given that resource-rich Russia is no longer a reliable source of energy, Kutani says many nations are now under pressure to weigh energy security in their strategies.

Prior to the outbreak of hostilities between Russia and Ukraine, many countries were seeking to achieve decarbonization, especially in Europe. However, security over the global energy supply lines has emerged as another priority since then.

Kutani says that, in hindsight, Japan looks to have made the right decision in retaining nuclear energy after the Fukushima disaster, despite calls to the contrary from opposition lawmakers and the public.

“Japan has access to trusted nuclear technology and domestic companies are capable of (producing reactors). In that sense, having such an option is desirable for politics and industries,” says Kutani, adding that Japan should also increase its share of renewables.

Other technologies, including ammonia and hydrogen, to produce environmentally friendly energy have been touted as promising alternatives, but it will take a while for such expensive options to become widely adopted.

The change in the government’s stance on nuclear policy will likely affect the domestic nuclear industry.

In its basic energy plan, the government expects nuclear energy to generate between 20% and 22% of Japan’s total output in fiscal 2030, up from 6.9% in fiscal 2021 due to many reactors remaining offline.

If Japan aims to generate 20% of its annual energy output from nuclear sources, “quite a number of reactors will have to be restarted, or else Japan will need to build new nuclear reactors,” says Hisato Kozawa, chief financial officer at Mitsubishi Heavy Industries, a manufacturer of nuclear reactors.

Mitsubishi Heavy exports equipment for nuclear power plants, but its main target is the domestic industry and so the firm is directly impacted by whether or not new plants are constructed, Kozawa says.

Focus on economic security
Security issues are equally important in terms of overall business strategy, as they are when formulating energy policy.

Economic security has been a key area of concern for policymakers and business operators in recent times due to the escalating trade rivalry between China and the United States.

However, the Russia-Ukraine war has prompted these parties to become more vigilant about the geopolitical risks associated with economic security, as well as possible ramifications for their operations.

“It’s more like a realization that (geopolitical risks) can really affect our business,” says Yasuyuki Harada, senior manager of the Economic Security Promotion Department at Mitsubishi Chemical.

Harada’s department is in charge of gathering information related to economic security, managing export controls, and coordinating cross-division and border communications. Mitsubishi Chemical had created a team in 2021 to oversee matters related to economic security, but unified the export management division last April to launch the current department.

Due to changing perspectives on economic security, Harada says “there is no doubt that we are under pressure to collect information in greater depth.”

Economic security became a new focal point for the business sector in Japan under Suga around 2021 in response to rising trade tension between the United States and China coupled with supply chains that were being disrupted by the pandemic.

A bill to boost economic security cleared parliament in May 2022.

The Russia-Ukraine war has accelerated the momentum, with more companies realizing the significance of economic security in terms of their supply lines.

Considering the change in circumstances, the role of the team in charge of economic security is becoming more critical for companies.

At large firms, it is often hard to identify who and which divisions are responsible for what in terms of economic security, so strengthening in-house networks is a must, Harada says.

“Close communication with group companies around the world is more essential now, so our department is becoming a key cog in the global network,” he says.

Around the world, various laws have been introduced in recent years to manage security concerns and geopolitical risk, making it important for companies to increase efforts to gather information.

What’s more, since knowledge and information related to economic security are usually dispersed over different departments, more business operators are “aiming to centralize them (in a particular unit), so that they can be more agile when something happens,” says Ko Yoshida, managing director at Deloitte Tohmatsu Group, which offers management consulting services.

Preparing for the future
Mitsubishi Heavy’s Kozawa says the impact of the Russia-Ukraine war has made the company more conscious of issues relating to economic security.

“In the wake of the Russia-Ukraine conflict, we have no choice but to keep a closer eye on geopolitical risks,” he says. “We have to consider what would happen if U.S.-China tensions escalate when thinking about our supply chains.”

To date, Mitsubishi Heavy’s supply chain has not been significantly affected as a result of Russia’s invasion of Ukraine, but the level of disruption would likely be far worse if a conflict involving China were to happen in Asia.

For instance, if economic sanctions against China were imposed and financial access was restricted, the impact would be “quite significant,” Kozawa says.

It’s relatively easy to run simulations of how such an event would affect businesses with direct suppliers, but when it comes to deeper layers of the supply chain, it would probably take longer to assess, he says.

“We are not fully tracking beyond our direct suppliers and where they procure their goods from, so the key point would be whether or not we would really be able to secure replacement products (in the event of a supply chain disruption),” he says.

Given changes to global business operations in the past year, coming up with risk scenarios and preparing for emergencies is becoming increasingly important for companies.

“(One of the key issues) for companies is how to maintain resilience in their supply chains from now on,” says Shunsuke Haba, senior vice president at Deloitte Tohmatsu Group.

When the concept of globalization and free trade was embraced in the past, companies were focusing on how they could build supply chains with low costs rather than contingencies in mind.

“(However) mindsets have changed and companies now procure from multiple suppliers in order to ensure a stable supply — even if it costs more,” says Yoshida of Deloitte Tohmatsu.

Other firms are ordering more common products, Yoshida says, noting that items with unique specifications are tough to procure if something clogs up supply lines.

Companies such as Canon and Yaskawa Electric are also looking to build new production bases in Japan in an effort to reduce supply chain disruption risks.

This could potentially be one of the longer-lasting impacts of the Russia-Ukraine war, with the government shoring up domestic production of key items such as semiconductors.

As a case in point, the government is helping Taiwan Semiconductor Manufacturing Co. finance the construction of a chip production facility in Kumamoto Prefecture. TSMC has said it is considering building another plant in Japan as well, although details are still unknown.

While the momentum to boost economic security is accelerating at home, domestic firms generally lag behind major overseas companies in terms of preparing contingency plans for a variety of scenarios and managing risk, Haba says.

“It’s really important to think through what the external environment might look like as well as what the possible scenarios may look like in five or 10 years,” Haba says. “Then look at what would be different from now in a level-headed manner (in order to assess what to prepare for the future).”