Nuclear Power-less Japan Must Pay for Fuel Imports in Weak Yen
Few are as eager as Prime Minister Shinzo Abe to see Japan’s idled nuclear reactors brought back into operation. Since the country flicked off the switch to its nuclear energy program a little more than a year ago, expensive energy imports, particularly of liquefied natural gas (LNG), have worsened trade deficits. That’s placed an extra burden on an economy that contracted at an annualized rate of 7.1 percent in the second quarter, its worst showing since 2009.
Abe’s push to restore Japan’s 48 reactors faces deep opposition from a public that can’t forget the radiation leaks from the Fukushima Daiichi reactor complex following an earthquake and tsunami in 2011. Revelations of the regulatory lapses that led to the leaks galvanized local governments to keep Japan’s other reactors idle after they were shut down for scheduled maintenance. By September 2013 the country was without nuclear power.
Japan’s Nuclear Regulation Authority, a new agency charged with overseeing the industry, is moving glacially to restart the idled reactors. So far, it has only deemed Kyushu Electric Power’s Sendai reactor in the southwest ready. Yuji Nishiyama, an analyst with JPMorgan Securities Japan, says he thinks only half of the 48 reactors will come back, and that might take until 2018. “I don’t have confidence about the timing,” he says.
In the next five years, 12 of the country’s reactors will turn 40 years old, considered a reactor’s operational age limit by Japanese regulators. Another four reactors are stationed only 6 miles from the wrecked Fukushima Daiichi plant, in a radiation no-go zone that most likely renders them inoperable. Work to upgrade the remaining reactors to post-Fukushima technical standards may cost more than $12 billion, a sum the utilities have already pledged.
Before the quake, Japanese reactors provided about a third of the nation’s electricity. With renewable energy not widespread enough to fill the gap, utilities and other companies have had to import natural gas to generate power. From 2011 through 2013, Japan’s trade balance worsened by a cumulative 18.1 trillion yen ($169 billion), estimates Taro Saito, director of economic research at the NLI Research Institute in Tokyo. Of that amount, 10 trillion yen, or 55 percent, came from energy imports. As a result, Japan’s trade balance has been in the red every month since June 2012.
Abe’s policies may have made matters worse. One of the goals of Abenomics—a three-pronged policy of radical monetary easing, fiscal stimulus, and pro-growth policies—was a cheaper yen, and thus more competitive exports. The yen has slid 23 percent vs. the dollar since late November 2012. Without that currency shift, which has made gas from abroad more expensive, post-quake energy imports would have accounted for only 7.7 percent of the negative trade swing, according to Saito.
Trade deficits can sometimes lead to a deficit in a nation’s current account, a broader measure of trade in goods and services as well as income flows from overseas investments. Until recently the size of Japanese companies’ foreign investments kept the current account in the black and helped sustain confidence in the government’s bonds.
As a result of the high cost of imported fuel, Japan’s current account registered a $3.9 billion monthly deficit in June. If such deficits persist, downward pressure on the yen could build. Investors may eventually demand higher yields to reflect rising inflation stoked by the weak yen, according to Chotaro Morita, the chief rates strategist at SMBC Nikko Securities. That higher interest cost would batter the government budget. The nation’s debt is equal to 244 percent of its economic output and is forecast to rise further.
The nation’s export model has been disintegrating for years as more and more Japanese factories head overseas. Yokohama electronics maker JVC Kenwood says the cheaper yen has caused difficulties. JVC found that it lost money making goods such as car navigation systems in its Southeast Asian factories for the Japan market. The cost of making the systems outside Japan went up with the drop in the yen, yet the price in Japan didn’t rise to compensate. It took months of stripping costs out of the navigation systems’ design to mitigate the effect of the weak currency.
The volume of Japanese exports has barely budged since late September 2012, despite the slide of the yen, according to the Ministry of Finance. “Most smart companies have already moved their operations overseas after years of a strong yen,” says Junzo Tamamizu, a managing partner at Clavis Energy Partners, a Tokyo-based consulting firm.
Moreover, Japan faces competition for the gas it’s importing. “The big guy across the sea, China, keeps increasing its gas demand forecast,” which works against efforts by Japan, the No. 1 LNG importer, to negotiate lower prices, says Joseph Jacobelli, a Bloomberg Intelligence analyst.
Whether or not Japan manages to restore a big part of its nuclear program, a lot will ride on its push to deregulate its domestic energy market. Nine major utilities control the power industry from generation to distribution to sales. In April 2016 access to the power grid will be opened up to outside players. That may help lower electricity rates and introduce renewable energy on a large scale. Japanese consumers should be grateful: They paid 28 percent more for electricity in September than they did four years before. Americans paid only 8.1 percent more