Japan economy seen weathering oil price surge
© 2000 Reuters Limited
September 12, 2000
Story by Masayuki Iwahashi
TOKYO - Heavily dependent on imports for its energy needs and still struggling to emerge from a decade of recession, resource-poor Japan would seem to have much to fear from current sky-high oil prices.
But analysts say recent price surges are likely to have only a limited impact on the economy, thanks to recent moves by industry to reduce its oil dependence and amid intense competition to keep retail prices low.
"I believe it will still take quite a while for hikes in oil product prices to filter through widely...and before that can cause overall price concerns, crude prices might drop," said Hisashi Yamada, economist at the Japan Research Institute.
Oil prices eased slightly yesterday, backing away from 10-year highs, after the Organisation of Petroleum Exporting Countries agreed to lift production in response to concerns that rocketing prices could spark a world recession.
Crude prices have tripled in dollar terms since early last year as OPEC producers curbed supplies. Three successive output increases this year have so far had little effect in reducing prices.
The price surge has revived painful memories in Japan of the oil shocks of the 1970s and 1980s, both of which had a severe impact on the economy.
The first oil crisis in 1973 helped knock down Japan's 1974/75 real GDP to minus 0.5 percent from 5.1 percent growth in the previous year, the first year-on-year contraction since the World War Two, according to the Economic Planning Agency (EPA).
IMPACT SEEN LIMITED
But despite being reliant on imports for more than 99 percent of its oil needs, Japan is unlikely to be plunged into crisis by the latest price jump.
For one thing, industries have reduced their dependence on oil by increasing their use of natural gas and nuclear power.
Trade Ministry data shows oil accounted for 52.4 percent of the country's primary energy sources in 1998/99, down from 77.4 percent in 1973/74.
In addition, major users of oil such as oil refiners, petrochemical makers, and airlines have been forced to avoid passing on higher prices to consumers due to tough competition in an economy where deflation fears are still lingering.
Reflecting this, the EPA said refined oil product prices rose only 5.8 percent in terms of consumer prices in the year through to last March, compared to a 95.6 percent in crude import costs in yen terms.
EPA chief Taichi Sakaiya has said a 10 percent rise in crude oil prices would push up Japan's wholesale prices by just 0.2 percentage point and consumer prices by 0.1 percentage point.
Tomonobu Wakabayashi, senior economist at the Industrial Bank of Japan, said a 30 percent increase in oil prices would push down Japan's gross domestic product (GDP) by just 0.1 percentage point.
"The impact is seen still minimal...and the (GDP impact estimate) model assumes cost rises are reflected in domestic prices," Wakabayashi said.
Under Wakabayashi's model, crude prices would have to surge more than six-fold to have a similar impact to the 1980/81 crisis, which helped knock around 2.5 percentage points off GDP growth.
REFINED PRODUCT PRICES ON THE RISE
Japanese oil refiners are gradually trying to make retailers and industrial customers swallow cost rises, analysts say, pointing out that retail gasoline prices recovered last month to levels last seen three years ago.
They also expect crude prices to stay relatively high through the winter on an anticipated heating oil shortage in the United States, despite Sunday's OPEC decision to raise crude output by 800,000 barrels per day from October 1.
That leaves room for stronger product prices, but economists expect any rises to be small, saying the main risk for Japan is a possible knock-on effect from the United States.
"If there is any impact on Japan's macro-economy, I rather see it coming from the U.S. where chances of inflation are higher," said Yamada of the Japan Research Institute.