Rising energy price, depreciating Yen and power shortage pose an ordeal for Japan’ economy

Electricity network in Tokyo was on the brink of a large-scale power outage in late March.

The power supply is being imminent challenges for Japan’s economy. In late March, the Japanese government issued the first-ever warning over electricity availability for the first time in history, asking households and companies to cooperate in saving electricity, saying that the tight power supply and strong demand in Tokyo and the Tohoku region could lead to a large-scale power outage as some power plants remain offline following an earthquake that occurred in the Tohoku region on March 16. Larger than usual electricity consumption due to cold weather in late March also reduced spare capacity of power supply in the region. The supply capacity of Japanese electric power companies has been lacking for several years since many of Japan's nuclear reactors have been offline under stricter regulations introduced after the Great East Japan Earthquake in 2011 leaving the country dependent on thermal power, accounting for 76.3 percent of total power generation capacity in fiscal 2020 ended in March 2021. 

Japan could see yet another power crunch next winter as demand may outstrips supply again, according to analysis from the country’s grid coordinator. In order to improve the situation, it is necessary to strengthen the transmission line network that enables power interchange between regions. However electric power companies in Japanese are reluctant to build new power grids and power plants because investment on them is not profitable while they are abandoning old power plants in order to improve efficiency to survive harsh competitions under the liberalization of electricity. 

The situation is getting worse in April when companies and factories based in Japan could not renew their power supply contracts. This is because an increasing number of electric power companies have stopped to conclude new contracts supplying electricity due to rising prices of crude oil and natural gas. After Russia's invasion in Ukraine, the transaction price of the Japan Electric Power Exchange, where suppliers and users buy and sell electricity, soared to quadruple from the same month of the previous year. 

Because of the abrupt increase in the cost of procuring electric power, the more the electric power company sell electric power, the more these companies incur loss. Even major electric power companies regulated by the government their supply capacity is scarce with many of their nuclear power plants being shut after the Great East Japan Earthquake. Eight of the ten major power companies have stopped renewing contracts with large users. As a result, even the Ministry of Economy, Trade and Industry, which has jurisdiction over Japan's electricity policy, has had difficulty renewing its electricity contract from April.

 

Japan's consumer prices reverse the course of decades long deflationary trend jumping the seventh straight month.

Soaring crude-oil prices caused Japan's consumer prices to rise in March at the fastest pace in over two years reversing Japan’s persistent deflationary trend of decades. According to the statistic released by the government the consumer price index, excluding fresh food, jumped 0.8 percent from a year earlier, the seventh straight monthly increase and marked the fastest year-on-year rise since January 2020. Drivers paid 19.4 percent more for gasoline in March from a year earlier. 

Overall energy prices were 20.8 percent higher, the biggest increase since January 1981, when crude prices soared amid the second oil crisis. Food prices also rose two percent excluding fresh items, the biggest increase in six years and three months. Ministry officials say they expect stronger inflation ahead because the impact of rising oil prices triggered by Russia's invasion of Ukraine will probably show up in the numbers for April and beyond. In addition, the Japanese real effective exchange rate reached its weakest level since January 1994. Matters could get worse, with analysts predicting a further 20 per cent depreciation. Given the effects of a fluctuating yen on Japanese consumers, further depreciations will be further blow to the economy.

 

Some companies in tourism industry foresee bright spots on the horizon.

To cope with rising energy prices some Japanese companies decided to use only renewable energy to power its operations.  For example, Tokyu, one of the largest commuter train operators in Tokyo, announced its huge network of train lines connecting Tokyo with the nearby city of Yokohama with more than 100 kilometers of railway tracks serving 2.2 million people a day do not produce any carbon dioxide emissions from April 1. 

On the other hand, long lines of travelers were again the norm at the start of the Golden Week holidays that started on April 29. It marked the first time since 2019 that the nation was entering the long holiday period without a state of emergency or other travel restrictions due to the COVID-19 pandemic. Long lines of passengers waiting to board bullet trains were seen at JR Tokyo Station during the holyday season. Central Japan Railway Co. said the occupancy rate for the outbound Tokaido Shinkansen had risen to 140 percent as of 10:30 a.m. on April 29.