Ditching Nuclear Risks Third ‘Lost Decade’ in Japan on Increased Oil Costs

Japan faces a third “lost decade” of economic growth as rising energy costs resulting from its shift away from nuclear power add to a fuel bill that already accounts for more than a quarter of its imports.

Prime Minister Naoto Kan’s effort to reduce reliance on nuclear energy would require the equivalent of 470 million barrels of oil a year, swelling the 17 trillion yen ($222 billion) annual cost of fuel imports and further burdening Japan’s $5.5 trillion economy, former Saudi Arabian Oil Co. manager Osamu Fujisawa said.

“Growth will already be difficult with persistent deflation, an aging and shrinking population and deficits,” said Fujisawa, now an independent energy economist in Tokyo. “Rushing Kan’s vision under those conditions would spell chaos for the economy.”

Japan is grappling with the worst atomic disaster since Chernobyl after an earthquake devastated Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant, prompting nationwide safety checks that have idled 72 percent of the nation’s 54 reactors. Kan, in a speech in Hiroshima on Aug. 6 marking 66 years after the U.S. dropped an atomic bomb on the city, promised “sweeping measures” to move toward a “nuclear-free society.”

Shrinking Economy

Japan’s gross domestic product shrank at a 1.3 percent annualized pace in the three months to June 30 after a revised 3.6 percent decline in the previous quarter, a Cabinet Office report showed today. More than two decades of government spending to revive growth following the bursting of the asset- price bubble in 1990 have saddled the country with the world’s highest level of public debt.

Turning away from nuclear power threatens a third “lost decade” as energy purchases drain money from the economy, said Hiroaki Norita, a researcher at JX Nippon Research Institute in Tokyo. China’s economic growth averaging 10 percent a year since 1989 helped drive up oil prices fourfold in that period, lifting Japan’s energy costs and stalling expansion by draining the wealth earned through exports, he said.

Japan relied on imports to meet 80 percent of its energy needs in 2009, World Bank data show, against 60 percent for Germany and 22 percent for the U.S. China imported 6 percent of its energy in 2008, according to the latest data available.

The suspension of reactors run by companies including Tohoku Electric Power Co., Tokyo Electric and Chubu Electric Power Co. helped boost Japan’s LNG imports by 35 percent in June from a year earlier. Crude oil purchases climbed 30 percent, the Finance Ministry said July 28. Total imports rose 9.8 percent, compared with a 1.6 percent decline in exports.

Power Bills

Returning the country to an almost total dependence on overseas oil and gas may increase power costs for companies such as Toyota Motor Corp., Elpida Memory Inc. and Honda Motor Co. Exporters are already struggling with a yen that has gained more than 50 percent in the past four years and disruptions to electricity and parts supplies after the magnitude-9 temblor.

Excluding capital and decommissioning outlays -- as well as costs associated with the Fukushima disaster -- producing power from gas and oil is more expensive than nuclear, according to government estimates. It takes 5.3 yen to produce one kilowatt hour of electricity from atomic power, compared with 6.2 yen for LNG and 10.7 yen for oil.

“Companies are going to take considerable cuts to their margins as electricity prices rise,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. (JPM) in Tokyo. “Manufacturing that relies on heavy power consumption is over, and the country’s economic structure needs to fundamentally change so that it supports industries that actually save electricity.”

Market Prices

Japan’s entry into the global market to buy the equivalent of an extra 1.3 million barrels of oil a day may lift prices.

If Japan “were to completely scrap its nuclear program and rely entirely on fossil fuels, this would be a big boost to demand for energy commodities,” said David Rea, Japan economist at Capital Economics Ltd. in London.

For now, concern that the U.S. and European economies are slowing is sending global commodity prices lower. Crude oil futures in New York fell as much as 7.7 percent to $80.17 a barrel in Asian trading yesterday.

A surge in public opposition to nuclear power means a cut in nuclear generation is inevitable, said Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute in Tokyo. More than 70 percent of respondents in a Kyodo News survey published July 24 said they favored phasing out atomic energy.

As higher electricity bills and concerns over power shortages push companies to move factories overseas, Japan’s demand for fuel will drop, offsetting some of the initial increases caused by a nuclear phase-out, he said. By then, the economy will have lost its “engine for growth” and will “atrophy over time,” he said.

“In the long run, a nuclear-free Japanese economy isn’t impossible,” Nagahama said. “Right now, we’re still fumbling in the dark.”

To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net; Maki Shiraki in Tokyo at mshiraki1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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