Nuclear-Free Summer Poses Growth Risk for Japan’s West
The Kansai area, which accounts for about a fifth of Japan’s economy and escaped the worst of electricity cutbacks after the March 11 earthquake and tsunami, last week lost its final operating nuclear plant. Power supply may be up to 25 percent less than peak summer demand if plants are not restarted, according to Kansai Electric Power Co. (9503)
Shortages drive up costs and force manufacturers to shift work schedules to lower-use periods, disrupting supply chains and adding to reasons to go abroad. The yen’s 47 percent climb against the dollar in the past five years has already hurt competitiveness enough to prompt firms from Nissan Motor Co. (7201) to Kansai-based Panasonic Corp. (6752) to move some operations overseas.
“Higher energy costs come on top of a strong yen and a shrinking domestic market for industries from steelmakers to major manufacturers,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo who has done research for the Bank of Japan. “It’s another reason to shift production overseas -- another brick in the wall.”
Only two of 54 reactors in Japan are operating after meltdowns at three of six at Tokyo Electric Power Co. (6503)’s Fukushima plant in last year’s disaster. By late April, a nation that received about 30 percent of its power from atomic stations before the quake may be at least temporarily nuclear-free.
Nationwide electricity rationing could cut gross domestic product growth by 1.8 percentage point to 0.1 percent in the fiscal year starting April by capping industrial production, discouraging investment and limiting exports, the Institute of Energy Economics, a government affiliated think-tank estimated in December.
The potential hit to growth would affect an economy just starting to gain momentum after contracting for three of the past four years. The government reported today a larger-than- forecast gain in industrial production in January after retail sales data yesterday also exceeded estimates.
In Osaka, Kansai’s biggest city, electric wire manufacturer Sumitomo Electric Industries Ltd. (5802) will spend 5 billion yen ($62 million) on generators and other preparations for power shortages and is also budgeting for energy costs to rise, President Masayoshi Matsumoto says. “With 6 to 7 billion yen, we could build a plant in Vietnam and make profit,” Matsumoto said. “Moving production overseas is of course one of the options we are considering.”
Rating at Risk
A diminishing manufacturing base and energy constraints threaten to add to deflation, the world’s biggest public debt burden, and an ageing population in hobbling an economy that’s smaller now in nominal terms than it was in 1995. Gross domestic product shrank 0.9 percent last year, compared with International Monetary Fund estimates in September of declines of 2.2 percent for Portugal and 5 percent for Greece.
Standard & Poor’s said last week that Japan’s AA- debt rating, the fourth-highest ranking, may be cut again if growth prospects worsen in the medium-term, while the Bank of Japan referred to “high uncertainty” over power supplies when easing monetary policy on Feb. 14. Liquefied natural gas imports rose to a record in January and the nation had its biggest monthly trade deficit.
The yen traded at 80.58 per dollar yesterday, compared with a post World War II high of 75.35 in October.
“The biggest concern from this electricity shortage is that we are making companies have no choice but to move overseas,” said Shigeru Suehiro, head of statistics at the Institute of Energy Economics, a Ministry of Economy, Trade and Industry affiliated think-tank founded in 1966. “It will leave a significant impact on Japan’s economy.”
Panasonic, the world’s largest maker of plasma televisions, said in November it would build a solar cell plant in Malaysia. Nissan, Japan’s second-biggest carmaker, shifted output of its March compact from Japan to Thailand in March 2010, citing the yen’s strength.
Last year, officials imposed 15 percent reductions for heavy power users in the wrecked northeast region of Tohoku and in the Kanto area where Tokyo sits. In the rest of the country, reductions were voluntary.
At the industry ministry, Noriyuki Mita, a policy planning division director, said that while officials want to avoid mandatory electricity limits, that depends on decisions about nuclear power. A group of four cabinet ministers, led by Prime Minister Yoshihiko Noda, will decide if or when reactors closed for servicing can restart after last year’s disaster raised safety concerns.
All 11 of Kansai Electric’s reactors are now out of service. While two may be ready to restart in April, Noda said Feb. 10 that even if reactors pass stress tests and are technically ready, the government won’t give approvals to power companies unless local authorities agree.
Around the country, only three of 29 local governments housing plants will accept restarts, with 24 authorities undecided and two against, the Sankei newspaper reported Feb. 4. In Kansai, officials have signaled opposition.
“Last year we took measures such as moving days off to conserve power by the 10 percent we were requested,” said Shinki Kawanami, a spokesman for Maruichi Steel Tube Ltd. (5463), a pipe and tube manufacturer based in Osaka that supplies Mitsubishi Corp. (8058) “This summer will be much tougher,” he said, adding that the company has looked at shifting production to plants in other places.
Electronic equipment maker Daihen Corp. (6622), also based in Osaka, and a supplier to Kansai Electric, sees shifting production elsewhere as “an extreme option,” according to environmental section chief Koji Moriyama. “We hope that, once safety is taken into account, nuclear plants will be restarted quickly,” he said.
Industry Minister Yukio Edano told BS Asahi television on Feb. 24 that it’s “necessary” to restart nuclear reactors to avoid power shortages, provided that it can be done safely and with the agreement of local residents.
In the west, some people express skepticism that any action will come quickly enough.
“I think people are underestimating the impact of this electricity shortfall,” said Masataka Nakagawa, head of the economy and industry department at the Osaka Chamber of Commerce and Industry. Telling manufacturers to save power again this summer is “like asking someone who’s already skin-and-bones to go on a diet.”
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