Of all the things Shinzo Abe thought might undo his legacy as economic savior, Iran may well have been the furthest risk from the Japanese Prime Minister’s mind.
But less than two weeks into 2020, the specter of renewed chaos in the Middle East is upending the calculus in Tokyo. Japan limped out of 2019 as trade-war headwinds slammed exports. It barely avoided a recession, imperiling its longest expansion since the 1980s.
Now, Tokyo confronts the risk of skyrocketing oil prices as US President Donald Trump ratchets up tensions with Iran.
Energy prices are surprisingly stable following the Trump-ordered assassination of Qasem Soleimani, the de facto commander of Iranian expansionist efforts in the Middle East. It is unclear if this stability will last.
That puts Asia’s energy-hungry manufacturing powerhouses – notably China, Japan, and South Korea – in harm’s way.
These are the dynamics wrecking Abe’s 2020. The first – the shadow of recession – can be addressed with government stimulus moves. The $121 billion spending jolt that Abe unveiled last month will paper over many a crack.
It is the second that presents a two-pronged challenge, and an unpredictable one at that.
On the one hand, Japan’s economy is uniquely vulnerable to a surge in oil prices, particularly in the Middle East. Oil stands at the center of Japan’s energy mix, accounting for 76% of all sources. And nearly 90% of Japan’s oil imports come from the Persian Gulf. This leaves Japan over a proverbial barrel should Middle Eastern hostilities escalate and unleash fresh energy-market chaos.
Energy has become an increasingly complicated – and contentious – topic for Japan. Since the 2011 Fukushima nuclear crisis, the majority of its 54 nuclear power plants have been idled. That has left Tokyo importing more and more coal, increasing its carbon footprint.
At present, coal accounts for 17% of the mix. The next largest source is hydroelectric at 4.4%, followed by liquified natural gas at 1.6%, renewables at 1% and nuclear at 0.6%. Japan, in other words, is about 94% dependent on fossil fuels.
That puts the country in a ticklish spot. No wonder organizers of the COP25 United Nations conference on climate change in Madrid last month rejected Abe’s request for a speaking spot.
Fossil fuel dependency makes Japan’s economy increasingly sensitive to oil spikes. The World Bank sees Japan growing 0.7% this year, which doesn’t leave much of a cushion should Trump intensify his trade war. Odds are, he will amid anger over impeachment and election-year wrangling. What better way to change the headlines than slapping new taxes on China or auto imports?
Then there’s the “wag the dog” risk clouding 2020. Washington pundits and Trump’s legion of critics have long speculated Trump might start a war to get re-elected. In part, because he spent years, in his pre-White House days, arguing that predecessor Barack Obama would do just that.
Trump’s Iran gamble could be the start of an increasing bet on poking Persian Gulf powers to cheer his base, but that could go bad quickly. His calls for additional sanctions on Iran alone raise the possibility of confrontation.
Even without military action in the Gulf, Japan is vulnerable to energy-price swings for two reasons. One: They reduce demand both for businesses and households. Two: the yen tends to rally sharply in times of global turmoil. This safe-haven dynamic would slam Japan’s biggest exporters and, ultimately, top-down growth.
Moreover, rising oil costs would generate “bad” inflation at a moment when the Bank of Japan is struggling to put growth on a stable, self-reinforcing path. Inflation rose just 0.5% in November year-on-year, a far cry from Tokyo’s 2% target. Higher oil prices act like a stealth tax increase, denting the economy.
The costs would surge exponentially if a full-blown military clash occurred. Japan’s oil reserves, it’s worth noting, are a source of secret concern in Tokyo. As of October, total oil reserves were 81.98 million kiloliters, or 515.64 million barrels. On paper, that’s supply enough to meet domestic demand for 234 days.
But recent inspections found that one-fifth of those stockpiled may be inaccessible in winter, causing alarm and chatter about an energy crunch.
The problem: tankers, thanks to rough winter seas, may have trouble reaching four of Japan’s 10 major storage facilities this year. The finding emerged from inspections following a June attack on a Japanese tanker near the Strait of Hormuz.
Regulations prohibit tankers to dock for loading when waves exceed 1.5 meters or when wind exceeds 15 meters per second. That could put sites in Akita, Fukui, Fukuoka and Nagasaki prefectures, housing in total about 18 million kiloliters of oil, largely off-limits.
Diplomacy stress test
The Trump era presents another big challenge for Abe. Japan’s pacifist post-war constitution bars it from fielding a conventional offensive military. Since 2012, Abe has pursued a controversial policy of “reinterpreting” the document. Come February, Abe plans to test constitutional limits further by sending a warship and patrol airplanes to the Gulf.
The planned mission has got a hell of a lot riskier since the US assassinated Soleimani. Abe is a cagey politician, and at present, he claims the deployment is a go even as public opinion swings against. Making the destroyer particularly vulnerable is that the Japanese vessel will reportedly deploy independently, rather than as part of a bigger, beefier US or international naval force.
In a Jan. 10 editorial, the Asahi newspaper concluded that the “government should suspend the plan and reconsider whether the deployment is necessary.”
Iran-US tensions are unwelcome developments given that Abe – ever the diplomatic pragmatist – has spent considerable energy wooing Iran.
In June, he became the first sitting prime minister to visit Tehran in 40 years. It was meant to rekindle a Japan-Iran relationship that has been shaky since the 1979 Iranian Revolution. Iranian President Hassan Rouhani has been planning a visit to Japan – to coincide with the destroyer deployment next month.
It is these close ties that had Trump enlisting Abe as an emissary of sorts last June, for Japan still has the benefit of a constructive relationship with Rouhani’s government.
Once Japan’s destroyer is in the Gulf, its mission will be explicitly separate from American interests. Even so, the vessel could well be caught in not just diplomatic, but actual military crossfire.
Abe and South Korea’s Moon Jae-in are under pressure to aid the US in the Gulf. It’s a safe bet that US officials upped the pressure at last week’s trilateral confab in Washington. For Abe, though, there’s every reason at present to put some distance between Japan and Trump’s America.
That will not be easy as Trump turns the screws on Iran – a situation that puts pressure on Tokyo’s diplomatic relations at the same time as it lays bare Japan’s addiction to Persian Gulf oil supplies.