IEEJ： February ©IEEJ 2024
Special Bulletin
A Japanese Perspective on the International Energy Landscape (675)

February 7, 2024

Importance of Japan's Energy Strategy Responding to Turbulent Situation
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, JapanFor Japan, which features an extremely low energy self-sufficiency rate, securing a stableenergy supply has always been a top priority. Today, Japan, which occupies the position of the world's
fifth largest energy consumer, depends heavily on fossil fuels consisting of oil, coal, and natural gas
for more than 80% of its energy supply. Because of its lack of domestic fossil fuel resources, Japanimports almost all of its fossil fuels for its consumption. As a result, its energy self-sufficiency rate is
as low as just above 10%, indicating a remarkably vulnerable energy supply and demand situation
among developed countries. Japan is also one of the world's leading CO2 emitters because it consumes
a massive amount of energy centered on fossil fuels. As one of the developed countries, Japan isrequired to take responsibility for addressing climate change issues to serve global interests. As longas Japan lacks abundant, inexpensive domestic energy resources and relies on securing energy supply
from the international market, it is destined to be exposed to fluctuations in international energy prices
and sensitive to the outflow of national wealth due to payments for massive energy imports and theimpact of energy price hikes on its consumers and economy.
For this reason, Japan has given policy priority to its energy strategy. In the face of a truly
national crisis caused by the first oil crisis in 1973, particularly, Japan has positioned energy security
as a top priority challenge and developed an all-out national strategy. In the 1990s, global warming
attracted global attention, prompting Japan to enhance its climate change countermeasures, including
those to achieve a legally binding greenhouse gas emission reduction target under the Kyoto Protocol.
At the same time, the liberalization and deregulation of the energy market emerged as an importantchallenge. Japan then promoted liberalization and competition in oil, electricity as well as gas markets
in that order. In the 1990s, crude oil and other energy prices were generally stable at low levels, withinterest in energy security declining relatively. Since 2000, however, crude oil prices have been on an
upward trend in line with China's massive energy consumption growth, leading energy security to
attract global interest again.
Against this backdrop, Japan enacted the Basic Act on Energy Policy in 2002, setting forththree energy policy pillars: "securing a stable supply (energy security)," "environmental suitability,"and "utilizing market mechanisms (economic efficiency)." Since the first letter of each pillar is "E", ithas become customary to refer to Japan's energy policy pillars as the "3E’s". After the Fukushima
nuclear plant accident, "safety" was added to the pillars, leading to the S+3E’s slogan. The Basic Act
on Energy Policy requires the government to formulate a "Strategic Energy Plan" that outlines Japan’s
target energy supply and demand structure and summarizes policies to achieve the target while being
updated every three years. Since the formulation of the first Strategic Energy Plan in 2003, it has
undergone a series of revisions. In October 2021, the cabinet approved the current sixth Strategic
Energy Plan. While setting out the S+3E’s slogan, the current plan gives top priority to the goals ofcutting GHG emissions in 2030 by 46% from 2013 and reaching carbon neutrality by 2050 in responseto the carbon neutrality trend that swept the world in 2020.
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Since the formulation of the sixth Strategic Energy Plan, however, Japan’s domestic andinternational situation has undergone dramatic changes. Under the new situation, Japan will begin
discussions toward the formulation of the next seventh Strategic Energy Plan this year. As is the casewith the current plan, it is essential for the next plan to strengthen efforts to combat climate change.
At last year’s 28th Conference of the Parties to the United Nations Framework Convention on Climate,
known as COP28, it was confirmed that the world will be required to reduce GHG emissions in 2035
by 60% from 2019 in order to achieve the goal of limiting global temperature rise to 1.5°C. With thisgoal in mind, countries are required to formulate voluntary GHG emission reduction targets, known
as NDC, for 2035 and submit them by around February 2025.
However, discussions on the next plan are certain to emphasize energy security. This isbecause the discussions are required to respond to the significant destabilization of the internationalenergy market caused by the Ukraine crisis, which came after the formulation of the current plan, andthe resulting emphasis on energy security. Furthermore, the electricity supply-demand crunch that
occurred in 2022 in Japan has greatly increased the awareness of the importance of a domestic stableenergy supply. There is also another extremely important change in the international situation. It is thedeepening division of the world, symbolized by the escalation of the U.S.-China confrontation. As aresult, the emphasis on economic security has led to a paradigm shift from free trade and theinternational division of labor to domestic production and the development of supply chains among
allies and strategic partners. There is also an emerging trend in which it is important for national
governments to take the lead in implementing national growth strategies and industrial policies fornational survival and development, rather than just leaving everything to market forces. In formulating
the next Strategic Energy Plan, it is essential to respond to these new circumstances.
Japan is thus required to enhance energy security and promote decarbonization in the divided
world and severe geopolitical environment. Complicating the situation is the fact that even developed
countries are no longer tolerant of rising energy costs and prices, with society being vulnerable toenergy cost hikes. As a result, each country is required to curb or minimize energy cost hikes based on
its respective conditions. To do so, each country must not only reduce costs for each energy source
and technology but also pursue the best mix of energy sources and technologies to minimize costs. Inpursuing the best mix, each country must seek to minimize costs from a macroscopic and panoramic
perspective in light of the new situation. In considering the best mix of power sources, for example,
we should not only focus on the unit power generation cost (like LCOE) but also take into accountcosts for power storage systems, supplementary fossil-fired power generation, and enhanced grids tointegrate variable renewable energy sources into the overall power system, as well as economic
security costs regarding growing demand and some specific countries’ market dominance for criticalminerals that will be increasingly required for renewable energy power generation, power storage
systems, and electric vehicles.
It is clear that the utilization of nuclear energy is the most important point for minimizing
costs based on the situation in Japan. This is because Japan can pursue the 3E’s most efficiently if it
restarts nuclear power plants and fully utilizes existing nuclear capacity while securing safety andgaining public understanding and acceptance. Robust discussions on the position of nuclear energy
towards the future beyond 2050 are also an important challenge that cannot be avoided in theformulation of the new Strategic Energy Plan.
In view of the importance of clean energy investment and innovation, which areindispensable for the energy transition, Japan must materialize initiatives to integrate its energy
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strategy with its long-term growth strategy and industrial policy in discussions on the new Strategic
Energy Plan. All major economies are emphasizing growth strategies and industrial policies forembarking on the energy transition. As Japan has achieved industrial and economic development byenhancing energy measures over the past half-century following the first oil crisis, it is hoped that thediscussions on the new plan will serve as a foundation to support Japan's future development. Whilethe new plan, as well as the past ones, depicts an ideal or target picture of Japan’s future energy
situation, Japan must exercise strategic thinking about how to cover the deviation of reality from theideal picture. Fossil fuels, including liquefied natural gas, may be required to cover the deviation. It
will be important for Japan to formulate a strategic plan to secure a stable energy supply with fullawareness of the potential deviation in the long energy transition path.

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