Japan Shows Economic Recovery Sign

During his first stint as prime minister in 2006, Prime Minister Abe’s Nuclear Energy National Plan from December 2006 talked about a “re-recognition of the importance of energy security in industrialized nations” with the direction of energy policy not being “Nuclear energy “OR” Renewable energy but Nuclear energy “AND” Renewable energy.” As a previous article argued, it is a return to this fundamental premise of energy security that Abe’s 2014 Basic Energy Plan will revert back to in post-Fukushima Japan.

Looking at his 2006 nuclear energy plan makes clear that Abe has never given up on the above tenet because of Japan’s very low energy self-sufficiency ratio (see previous article) and “policy costs” – i.e. regulatory measures taken as part of the Japanese government’s post-Fukushima nuclear energy and macroeconomic policy – for the Japanese export industry associated with the current “zero nuclear” scenario. This is also very much in line with what the Japanese newspaper Yomiuri Shimbun advocates:

”[The] government should seek a good balance from diverse energy sources. It is desirable that thermal power, nuclear power and renewable energy – such as solar and wind power – play complementary roles.”

In this respect, the New York Times cites Toshimitsu Motegi, Japan’s Minister of Economy, Trade and Industry, calling the post-Fukushima policy of forgoing nuclear power entirely irresponsible for a resource-poor nation. So, how and where in the Japanese economy do those “policy costs” manifest themselves?

By calling the “zero nuclear” policy irresponsible Motegi alludes to the rising cost of electricity – a direct result of idling all of Japan’s nuclear reactors – and the damage to Japan’s trade balance from sharply increased fossil fuels imports. Japan is currently the world’s third-largest oil importer, second-largest importer of coal, and the largest importer of LNG. According to the EIA using METI data, the removal of its operational nuclear power capacity altered the Japanese power generation portfolio mix with LNG rising to 48% of total power generation, as nuclear power’s share fell to 2% in 2012. This significantly increased LNG share – from 27.4% pre-2011 – comes with a huge price tag for both the electric utilities and the government, all leading to a record trade deficit of 11.4 trillion yen in 2013 that has inflicted a high economic toll on Japan, which sources a significant portion of its GDP from energy-intensive manufacturing industries. The Financial Times reports that the surge in Japan’s sizeable fossil fuel imports added more than 3 trillion yen to electric companies’ annual fuel-procurement costs.

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Power Generation Mix for Japanese Utilities

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Source: Institute of Energy Economics (IEEJ)

This chart shows that electrical power generation from fossil fuels is projected to be 22% higher in FY2014 than in FY2010, while anticipated restarted nuclear power generation is still projected to be 72% less in FY 2014 compared to FY 2010. Note the marginal contribution – about 2% – of renewables.

In essence, the issue becomes international competitiveness, which is particularly important to Japan – along with its standard of living – owing to Japan’s high dependency on exports. According to tradingeconomics.com, in 2013 Japan’s main exports were: transport equipment (23% of total exports); machinery (19%); electrical machinery (17%); chemicals (11%) and manufactured goods (13%). This list illustrates that Japan’s ability to maintain international competitiveness is not just an issue for some companies and some sectors. In fact, losing international competitiveness through unnecessarily – due to “policy costs” – high energy costs will affect the entire economy, the Japanese population’s private consumption and Japan’s fiscal position. This will lead to considerable economic losses with industrial growth stymied for the whole economy as well as for specific industrial sectors key to Japan’s export performance.

The lesson is that a resource-poor country should not establish additional self-inflicted resource dependencies. Japan can also not follow Germany’s example (see previous article for why not), which, in addition, is also embedded in a totally different security environment. The ongoing Sino-Japanese tensions over the Senkaku islands – also known as the Diaoyu Islands – in the East China Sea should make the Japanese hesitant to put to rest their formidable nuclear energy infrastructure. Nobody can really assess what the security treaty between the U.S. and Japan will be worth in decades to come given future changes in relative power, U.S. budget constraints and the volatile security environment in Asia. Japan needs to keep all its options open and not further exacerbate an existing energy supply dependency – Japan imports about 84% of its energy needs. This thinking appears to inform Abe’s government policy regarding nuclear energy in 2014; namely, a “re-recognition of the importance of energy security in industrialized nations.”

Renewables are expected to play a major role, as the new Basic Energy Plan intends to cut the share of nuclear in the energy mix as much as possible. Research conducted by Hiroshi Hamasaki on the role of renewable energy after Fukushima should caution against inflated expectations:

“The Japanese electricity system is comprised of 10 grids with very limited inter-connection. Further complicating matters is the fact that 3 grids use 50Hz and 7 grids use 60Hz. According to a Ministry of the Environment (MOE) study (…), most renewable potential, especially wind turbine, exists in the north-most region that is far from demand centers. Grid expansion would be an important part of the efficient plan.”

Given the current Japanese electricity grid and system integration is very limited, this serves as an additional argument for making the greatest possible use of existing nuclear power plants deemed to be safe by the regulator. In Japan’s special case, given the country’s population density, topography, and earthquake proneness, nuclear power plants need to be strategically situated – that is, not on major active seismic fault lines – and closely monitored. Restarting only those reactors will allow Japan to pare back some LNG imports, reduce energy costs and the concomitant impact on Japan’s export-led economic growth, and allow it to maintain global competitiveness.

However, this is at most only a first step. Surprisingly and most interestingly, the last chart clarifies that even in a hypothetical – but unlikely – “full operation case” in terms of available restarted nuclear power capacity, the metrics in FY2014 vis-à-vis FY2010 would take a step backward across all categories, with the exception of energy-related carbon dioxide emissions. In that case, carbon emissions would come down to FY2010 levels.

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Source: Institute of Energy Economics (IEEJ)

 

 

 

 

 

 

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