By Max Sato
(MaceNews) – Japan’s wobbly economic recovery faces downside risks from high energy and commodities prices, which have surged on tensions over Ukraine between Russia and the West and could rise further on supply concerns now that Russia has invaded its neighbour.
The direct impact of economic sanctions against Moscow on Japan’s trade with Russia is believed to be limited as Japanese exports, led by vehicles and machinery, accounted for only 1% of their total in 2021. Japan imports about 10% of its liquefied natural gas needs from Russia while those from Australia, Malaysia and Qatar account for over 60% of its total LNG purchases.
But Europe’s heavy dependence on natural gas supply from Russia (mainly via pipelines), at around 40%, is a cause for concern as energy costs for the region could surge and hurt businesses and households, which in turn would lower global economic growth, and thus Japan’s recovery from the pandemic.
The conflict has global energy supply implications. Russia is the world’s third largest crude oil producer after the U.S. and Saudi Arabia. Its natural gas production is the second largest after the U.S.’s.
The first round of sanctions on Russia by the U.S. and its allies is unlikely to deal a major blow to the Russian economy because they do not cover the country’s oil and gas exports or banks associated with those transactions, which is designed to avoid a “boomerang effect” on industrialized economies through a spike in energy prices, Takahide Kiuchi, executive economist at Nomura Research Institute, wrote in his column published Thursday.
“But if Russia’s military activity in Ukraine intensifies, the U.S. or advanced economies are expected to impose tougher second and third rounds of sanctions,” Kiuchi, who was a Bank of Japan board member from 2012 to 2017, wrote. “The U.S. is considering effectively banning exports of semiconductors and other high-tech products to Russian firms specialized in AI and robots, a measure from a longer-term viewpoint aimed at delaying the modernization and diversification of the Russian economy.”
Japan followed its allies by imposing sanctions targeted at President Vladimir Putin’s inner circle. It will suspend visa issuance for officials from two pro-Russian separatist regions in Ukraine and freeze their assets. It will also ban trade with the two regions as well as the issuance and trading of new Russian sovereign debt in Japan.
“We will have to consider taking further actions swiftly if the situation gets worse… in coordination with the G7 countries,” Prime Minister Fumio Kishida told the upper house budget committee on Thursday.
The auto and electronics industries are also bracing for worsening of global supply chain bottlenecks amid the Russia-Ukraine conflict. Russia is the world’s largest producer of palladium, a key component in emissions-reducing devices for vehicles and for making semiconductor chips.
After a temporary easing, the average price of regular gasoline in Japan this week rose to an over 13-year high of Y172.0 ($1.49) a liter from Y171.4 last week for the seventh straight weekly rise, data from the Agency for Natural Resources and Energy released Thursday showed. It was the highest level since Y170.2 seen on Sept. 29, 2008, and is edging closer to the record high of Y185.1 hit on Aug. 4, 2008.
Without the recent government subsidy to oil refineries, fuel prices in Japan would be even higher.
The prices for daily necessities ranging from dairy products, bread, noodles and cooking oil to tissue and toilet paper have been rising on supply constraints caused by the pandemic, and retailers are set to raise prices further amid surging material and shipping costs. Households have also been hit by higher electricity and city gas charges.
Russia is among the world’s top suppliers of commodities including canola, corn and wheat, being the largest exporter of wheat (China is the biggest producer), and Ukraine also plays a key role in grain supply.
Japan’s consumer inflation, led by energy and processed food, has picked up to just above zero and is projected to average about 1% in the next fiscal year starting in April, but that will be still well below the Bank of Japan’s 2% target.
This appears to be less troubling, compared to inflation risks facing the central banks in North America and Europe, with the US annual inflation hitting a four-decade high of 7.5% in January, but Japanese voters are closely watching how Prime Minister Kishida will cushion the impact of rising costs of energy (+17.9% y/y in January CPI), fresh food (+6.5%) and processed food (+1.3%) while real wages are falling.
“I believe the current situation is unlikely to cause an immediate major hindrance to stable supply of energy,” Kishida told reporters on Wednesday. Japan’s strategic crude oil stockpile held by the government and private sector covers about 240 days of national consumption and Japanese power and gas firms can supply two to three weeks of LNG from their combined inventories, he said.
Contact this reporter: max@macenews.com
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