Market Analysis

A Look at Japan’s Energy Reforms

Yen weakness and expensive energy imports may be the catalyst for energy market deregulation in Japan—an important step to regaining economic competitiveness.

Japanese energy markets have struggled since nuclear power went offline in response to the Fukushima-Daiichi disaster in March 2011. Before Fukushima, Japan got about 30% of its power from nuclear energy. Since the disaster, however, Japan’s had to rely on fuel imports, which now make up about 90% of its energy (Exhibit 1). And as the yen has weakened, imported fuel has become increasingly expensive (Exhibit 2). That’s put significant pressure on Japanese utilities and businesses.

Exhibit 1: Energy Imports Are Rising Post Fukushima

Source: Petroleum Association, Japan; Fisher Investments Research. HT: Alex Nelson.

Exhibit 2: Energy Costs Rise as Yen Weakens

Source: OECD, Thomson Reuters, Fisher Investments Research. HT: Alex Nelson.

Businesses have long campaigned for a nuclear restart, but popular anti-nuclear sentiment kept previous administrations from bringing plants back online. Now, however, it seems that’s changing—frustration over higher energy costs is starting to outweigh public angst against nuclear, and new Prime Minister Shinzo Abe’s campaign pledge to restart nuclear power plants deemed safe didn’t turn off voters.

Earlier this month, Abe made good on that pledge. His cabinet approved plans to overhaul Japan’s energy markets and, in the process, restart the safest nuclear plants. Abe’s 70%-plus approval ratings suggest he can pull this off, especially if the BoJ’s new aggressive easing causes the yen to weaken further—Abe can rightly claim high energy costs are a significant economic headwind and rally support for nuclear.

Restarting nuclear plants is only a small piece of the energy reform package. Officials also proposed deregulating Japan’s entire energy system. Currently, Japanese power is dominated by 10 regional energy monopolies, which control electricity generation and distribution in their local markets. Not only is there no pricing competition, but there’s almost no innovation—if firms can protect profit margins by controlling prices, there’s not much incentive to develop new technologies to become more efficient.

Abe’s proposal would change this by creating a national energy grid (instead of the inflexible regional system), unbundling electricity generation and distribution and fully liberalizing the market over the next seven years. It would also encourage investment in new technology, including 21 new geothermal power plants.

If these plans go through, Japanese people and businesses would benefit tremendously from freer, more modern energy markets. However, it’s not a done deal. Parliament must approve the measures, and the regional monopolies—powerful political interests—likely put up a fight. Yet Abe seems willing to spend some political capital to see this through—a good sign not only for these proposals, but for his willingness to take on vested interests as he pursues what he calls “emergency structural reforms.” However, with proposals for corporate reform and deregulation not due until June—and with upper house elections looming in July—it’s still uncertain how far Abe’s willing to go.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.