COVER STORY • 1

HRoundtable with Prof. Ken Endo, Dr. Shumpei Takemori, Tatsuya Terazawa & Masakazu Toyoda

ow Should We Interpret
Geopolitics, Economy & Energy
Developments in Today’s World?

By Japan SPOTLIGHT
Experts: Prof. Ken Endo, Professor of The University of Tokyo, Japan (International Politics)
Dr. Shumpei Takemori, Former Professor of Keio University, Japan (Economics)
Tatsuya Terazawa, Chairman of The Institute of Energy Economics, Japan (Energy)
Moderated by Masakazu Toyoda, Chairman of Japan Economic Foundation (JEF)(Online Roundtable on Nov. 28, 2022)
Experts

Prof. Ken Endo

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Dr. Shumpei Takemori

Toyoda: The Russian military invaded Ukraine on Feb. 24, 2022
without any warning and many Ukrainians have been killed or havesought refuge overseas or are remaining in the country underserious threat of attacks as well as a shortage of electricity and foodsupplies.
The impact of these shortages is spreading out of Ukraine andworld energy and food prices have been rising, threatening the livesof people all over the world, including in developing nations. This iswhat we call the Ukraine crisis.
This Roundtable of experts on international politics, international
economy and energy aims to discuss how to interpret this crisis:
what exactly is happening, why is it happening and how can we copewith it.

What Is Happening?
Toyoda: Mr. Terazawa, I would like to ask you how seriously the
global energy situation is now under threat, how much energy prices
are rising and how the situation is different among nations or
regions. To my knowledge, Japan’s imported energy prices arecheaper than many other countries’ thanks to the high proportion of
4 Japan SPOTLIGHT • January / February 2023

Tatsuya Terazawa

Masakazu Toyoda

long-term contracts in energy imports, but the situation has been
recently changing. On the other hand, it seems that some companies
have ceased to conclude such long-term contracts.
I have also another question. Do you think fossil fuels have truly
no positive prospects? Or do you think we can continue to use themby turning them into hydrogen or ammonia by decarbonization?

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Terazawa: Russian oil’s share of the global market is 12% and its
8natural gas share is 24%.
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Thus, with Russian oil and gas supplies to the West impeded,
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there must be an enormous impact on the global energy market.
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After the invasion, the price of crude oil once rose to US$130 per
12barrel and the natural gas price in terms of crude oil equivalent rose 13
to $600 in the European market, while LNG in Northeast Asia hit
14$400. Compared with the crude oil price, the price increase of natural 15
gas or LNG was significant. This is because a tanker could transport 16
crude oil anywhere in the world, but natural gas can only be
17transported by pipelines and LNG can be transported only by LNG
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tankers after being cooled. Thus, the latter two are short of mobility. 19
With a supply shock, prices of the latter two fluctuate more than20
crude oil prices and this results in a more serious economic impact
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https://www.jef.or.jp/journal/

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overall.
At this moment, since there is concern about a stagnant global
economy, energy prices have started to drop; the current crude oil
price is around $80, the European natural gas price in crude oil
equivalent is below $200 and the Northeast Asian LNG price is lessthan $150. But we must say those energy prices remain high.
How much each nation pays for its energy is another story. Whilenations in the West, including Japan, stop imports of Russian oil,nations not participating in the economic sanctions against Russia
continue to buy Russian crude oil at discounted prices, cheaper than
the world oil price by 20-30%. The notable examples are India, China
and Turkey. These countries can continue to buy Russian energy at
prices close to those before the crisis, meaning that energy prices
are relatively moderate for them. On the other hand, the nations
suffering most from energy price hikes caused by the Ukraine crisis
are European nations. This is because prior to the crisis 40% ofEurope’s gas consumption was from Russia through pipelines andwith the Ukraine crisis greatly limiting these imports, they are now
facing a supply shortage of natural gas. In addition, as they
compensate for this shortage with LNG imports from the rest of theworld at high prices, this will result in a serious impact on energy
prices in Europe.
As for Japan, we have in general a similar impact from the crude
oil price hike to that in the West, as this is the global market price.
On the other hand, Japan’s LNG imports are significantly based onlong-term contracts and the contracted price is mostly connectedwith crude oil prices. Since the crude oil price hike has been more
moderate than the spot market price of natural gas or LNG, Japan’s
imported LNG price rise in long-term contracts has been restricted toa moderate one. Thanks to these contracts, Japan has not faced yet
the supply shortage of LNG as in European nations. So I believe theenergy crisis impact overall on Japan has been more moderate thanin Europe.
However, these long-term contracts were concluded a long timeago, and after 2029 the percentage of the long-term contracts inparticular will be declining. Japan had not renewed those contracts
before the Ukraine crisis, though there were opportunities forrenewal. The background was the growing uncertainty about the
future of fossil fuels. LNG users in Japan, electric power companies
or gas companies, were hesitating in making long-term
commitments. Under such circumstances, the crisis happened.
My concern is that Japanese companies are still hesitant aboutcommitting to long-term contracts even after the crisis, while

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Takemori: At this moment, gas and oil price rises are coming under 21
22control, because global weather in autumn and winter 2022 was
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historically warm. Without this, European gas storage would be
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exhausted and planned blackouts or suspension of factory
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operations would be needed. China’s zero Covid-19 policy by
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continued lockdown of major cities has also been affecting the
supply-demand situation of gas and oil, as the Chinese economy is a 27
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fossil-fuel consumption-led economy emitting a quarter of the29
world’s carbon emissions and its decline in demand for energy
30sources would ease the global energy situation enormously.
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Europe could increase storage of gas in 2022 because it could
import Russian gas by pipeline in the first half of the year. However, 32
now that Nord Stream 1 is almost suspended and Nord Stream 2 will 33
not be used hereafter either, it will be difficult for Europe to build up 34
storage in 2023 and thus we presume that the winter in 2023 would 35
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be very tough.
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I think Japan’s energy situation will be a tough one as well in the38
winter of 2023. On the question of Japan’s long-term contracts of
39gas, in December 2021 when the risk of a Russian invasion of40
Ukraine was globally recognized, the time for renewal of long-term
contracts by Japan with Qatar came, but it was not done. I wondered 41
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why.
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I have a question about the new direction of Russian exports ofGerman companies and others are working hard to secure LNG
imports and LNG-producing nations are becoming aggressive inrefusing to sell LNG to them without their long-term commitments.
Chinese national companies are now securing many long-term
contracts. So the weight of Japan’s long-term contracts in LNG
imports will decline in the future and the weight of spot contracts
increase. Japan could suffer from a negative impact as in Europe
now. I think this would be a challenge for Japan in the future.
To overcome this, we would need a roadmap to show how natural
gas can be utilized in the long run. Otherwise, Japan’s natural gas
users cannot step into concluding long-term contracts.
Assuming that natural gas would be made into hydrogen orammonia (realizing what we call blue hydrogen or blue ammonia) in
the long run, we should prepare a path for such new use of natural
gas to achieve less dependency on Russian energy sources while
securing long-term demand for natural gas as blue hydrogen or blue
ammonia. In that way we can make long-term commitments forstable procurement of LNG. At the same time, we can contribute toresolving global warming through blue hydrogen or blue ammonia.

Japan SPOTLIGHT • January / February 2023

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gas. After Europe ceases importing Russian gas, Russia must
redirect it to other countries. There is a plan for a pipeline
construction, “Power of Siberia 2”, from the Yamal Peninsula facing
the Arctic Sea through Mongolia to big cities in China. This isplanned to be completed around 2030. My question is if China will be
truly capable to realize this pipeline construction plan to import
Russian gas. I am skeptical about China’s capability to achieve thiswithout Western nations’ technological support. When the accident
in Nord Stream 2 happened in 2022, we clearly learned that Western
technology was needed to maintain the pipeline. The pipeline
stopped to operate because Canada, a producer of motor propellers
for the pipeline, refused to deliver those under repair to Gazprom due
to economic sanctions against Russia. With clarification that Russian
pipeline operations would need Western technology, I am skeptical
about only Chinese and Russian technologies being able to realize agigantic pipeline construction plan connecting the Arctic Sea with big
Chinese cities.
Terazawa: It is true that the energy situation will be more serious in
2023. In particular, China’s decreased energy demand due to its zero
Covid-19 policy has certainly contributed to loosening demand andsupply at the end of 2022. If the Chinese economy recovers strongly
in 2023, global energy demand will increase strongly as well.
In the case of Europe, in the winter of 2022 it could pile up stocksof Russian oil, but in 2023 it cannot do so. It is true that Europe will
face a more severe winter in 2023. It would normally take several
years to increase LNG supply capacity, so we will see uncertainty
and extreme instability in energy supplies including LNG and natural
gas until around 2025.
Certainly, Russia has a project to construct a pipeline to China andis eager to achieve it. China was the largest LNG importing nation in
the world in 2021, having overtaken Japan. To meet its tremendous
demand, it has to diversify supply sources, so it would also eagerly
pursue construction of a pipeline from Russia as one of its
diversified supply sources. However, China would be shrewd to
avoid depending solely on one source like Europe and pursue a wellbalanced regional allocation of supply sources, considering Russian
sources as one of them.
How could it achieve this with its heavy dependency upon Western
technology? Having perceived a risk of depending on US technology,
given the current US-China high-technology conflict, China would try
to take maximum advantage of its own technology. It has its own
technology that has been used for pipeline construction so far and it
6 Japan SPOTLIGHT • January / February 2023

will seek to develop it, apart from whether it is the best or not.
However, as it will take time to accomplish such a pipeline, nofundamental development will occur in the energy situation soon.
The instability of the LNG market will continue for the time being.
Takemori: I have another question for Prof. Endo. Before Russia’s
invasion, Germany’s dependence on Russian gas supply was very
high, with 55% of its energy consumption depending on Russia.
With the addition of Nord Stream 2, its dependency would further
increase. When Russia occupied the Crimea in 2014, German
Chancellor Angela Merkel must have actively joined in economic
sanctions against Russia, but at the same time Germany has been
deepening its dependence on Russia since then. Why do you think it
has been doing so?
Endo: Germany’s dependence on Russia had been an important partof its economic development model together with a cheap euro andthe gigantic Chinese market. With the Ukraine crisis, this model has
collapsed. Germany maintained a policy of engagement with Russia,
assuming that Moscow would liberalize its economy and eventuallypolitics, too.
However, the Ukraine crisis proved otherwise. Current German
President Frank-Walter Steinmeier expressed regret about his
permissive treatment of Russia when he was foreign affairs minister.
Toyoda: I would like to ask Prof. Takemori about the global
economic outlook. Needless to say, the Ukraine crisis has a big
impact on the global economy which is still reeling from the lingering
impact of the pandemic crisis. In the next few years, what do you
think the global economy will look like?
Takemori: In 2023, with the more severe energy outlook,international organizations like the IMF or OECD have presented a
pessimistic outlook for the global economy. The short-term
challenge is inflation. To cope with it, the United States rapidly raisedinterest rates and inflation fell to around 7%. Developing countries
must be relieved to see it. With high energy prices and food prices,
their economies have been slowing down. A continued climb in US
interest rates would exacerbate their foreign debt problems as they
have a large amount of debt in dollars, and many of them would haveto seek help from the IMF.
Meanwhile, in Europe, core price indexes except for energy items
have not been rising much, unlike in the US. This is why the

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European Union’s interest rate rise is more moderate than the US.
Another reason is that in the EU there is one central bank and eachmember nation has its own public finances, which means asignificant rise in interest rates would put the public finances of theweaker economies such as Italy, Spain and Greece into a criticalsituation. So I think inflation in the EU will continue longer.
Whenever high inflation occurs, Germany makes noises to the ECB,
but today it is exceptionally quiet. This is probably because it regrets
its excessive energy dependency on Russia. With a worsening
economic situation hereafter, the EU may decide its own fiscal
expenditure again to support the member nations, such as with the“Restoration Fund for Recovery from the Pandemic”. But in the longrun, its energy policy must pursue blue energy, renewable energy
and small nuclear power as its core energy supply by around the2030s. Meanwhile, the global decarbonization drive exerts downward
pressure on fossil fuel investments so that we see global fossil fuelsupply failing to meet global demand.
Until around 2025, the global energy situation will be at a criticalstage if all nations try to mitigate their energy dependency on Russia.
Even after 2025, I have concerns that the energy crisis may continue
until 2030.
On developing nations, their food crisis was focused on thediscussions at the international meetings in November 2022. At thismoment, the issue is not only about the war preventing Ukraine fromexporting its food items but also the high rise of prices of chemicalfertilizers overshadowing affected economies. There is even a
concern about whether it would be feasible to maintain a world
population of 8 billion people without chemical fertilizers using
ammonia. Anyhow, how we deal with this mid-term energy crisis will
be an extremely critical issue.
Terazawa: We argue on the impact of energy prices in dollar terms
in the world market, but in Japan the issue is yen-based. In the caseof Japan, the impact of energy price hikes is duplicated with the
yen’s depreciation. I have two questions for Prof. Takemori. My firstquestion is how we should manage monetary policy in Japan,
seemingly today inviting yen depreciation. And my second question
is about energy subsidies.
Daniel Yergin, a distinguished energy policy expert, mentionedthat this crisis would be interpreted as the first crisis of an energy
transition which started in autumn 2021 even before the Russian
invasion.
The background of this crisis is underinvestment in fossil fuel

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Takemori: Exchange rate fluctuations are generally caused by the27
interest rate differential between the US and Japan. And in the US,
the high interest rate now is due to an extremely high inflation rate in 28
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the US. Meanwhile, Japan’s inflation rate is not so high. It is now
30around 3% and thus Japan does not have an urgent need to raiseinterest rates. I think low wage increases must be the reason for the 31
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low inflation rate. To maintain full-life employment in Japan, there
tend to be so many workers in unnecessary sections of unnecessary 33
industries. To keep such inefficient employment, Japanese business 34
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continues to go through any economic situation without raising36
wages. This must be a cause of low productivity as well as low
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wages and low prices. To work on reforming this fundamental
weakness of the Japanese economy, we should introduce “layoffs” in 38
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Japan, though it would cause a serious economic challenge in the40
short run. With its introduction, labor mobility will be enhanced.
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Competition in the job market would be encouraged, and more
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competent workers would get jobs with higher salaries. In other43
words, employers would need to pay more to get competentdomains and rising prices triggered by it, and Russian President
Vladimir Putin’s Ukraine invasion having tried to take advantage ofthis situation. These serial events pushed energy prices even higher.
Under such circumstances, Germany has never thought aboutchanging its energy policy. Its policy is in general to accelerate theuse of renewable energy, though it provisionally prolonged use of
nuclear power but only until spring 2023, and also prolonged use ofcoal in the short run.
Investment in fossil fuels has continued to decline reflecting thispolicy adopted not only by Germany but also by other European
nations and the US. In this light, if demand for fossil fuels hereafter
remains higher than the level which people promoting policies for
mitigating global warming have ever thought, its supply would notmeet demand. Such underinvestment in fossil fuels in the long run
would result in an energy market structure extremely vulnerable toexternal shocks. A big crisis like the current Ukraine crisis would
cause a seriously negative impact upon the world economy and I
have a concern that such a crisis could be repeated in this vulnerable
energy market structure.
I would like all nations including Germany to take note of this andadopt a well-balanced energy policy to encourage necessary
investment in fossil fuels to meet rather continuous demand in thelong run as well as promoting renewable energy, since renewableenergy cannot meet all the energy demand quickly.

Japan SPOTLIGHT • January / February 2023

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employees and thus wages would rise and the inflation rate could
also rise. There would be more room for raising interest rates, which
is supposed to be normal.
Anyway, on the fiscal policy side, we would need to pursue a wise
spending policy, namely more budgets for necessary policies suchas accommodating electric power systems to introduce solar or wind
power while cutting budgets for unnecessary policies. This will be
extremely important.
Many economists today would say that fiscal policy and monetary
policy should work together in the same direction, namely both ofthem should work expansively on deflation and both should betightening on inflation. This means there would be fewer boundaries
between both. Both of them should work together in collaboration as
an integrated policy to control total effective demand. With
inflationary concerns modified, fiscal policy as such should focus onwhat is to be truly needed selectively.
Toyoda: A question for Prof. Endo. In terms of international politics,
world nations seem to be divided into three groups: the US, Japanand Europe; Russia and China; and lastly third countries. Meanwhile,
the Ukraine crisis was apparently and unanimously considered to becaused by violation of international law. In spite of all this, the UN,
G7 or G20 are not working well in dealing with this violation. Whatdo you think is happening exactly?
Endo: I think this war is to be defined as an unlawful invasion
reversing a century-long effort by human beings to define wars as
unlawful actions and contain war crimes, or more specificallycontradicting the Anti-War Pact of Paris in 1928 or the Geneva
Protocol in 1924 defining a war of invasion as a crime.
However shocking it may look, this is a large-scale limited war,since the combative nations and the means of combat are limited,while in terms of the scale of human casualties and firepower
involved it is equivalent to what Russia experienced in the first phaseof German-Soviet conflict during World War II.
The United Nations Charter provides veto power for the permanent
members of the Security Council and therefore as is predicted, theUN does not function if one of those members commits an unlawful
action.
In a different perspective, the implication of veto power given topermanent members of the Security Council is that they are not toengage in a war against each other. Without this veto system, othermembers might have had to fight a war with the Russians, under the
8 Japan SPOTLIGHT • January / February 2023

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Why Has This Happened?
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Toyoda: Can we interpret this war as being provoked by Putin’s
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nostalgia for the Soviet Union and a sense of being under threat of
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from a NATO invasion of Russia, as well as the Russian authoritarian 32
political regime? Some people say that China is also under an33
authoritarian regime like in Russia. The latest appointment of the key 34
officials in the Communist Party and the administration in 2022, to35
the majority’s view, showed that power is getting concentrated on
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President Xi Jinping’s aides and people with views different from his 37
are eliminated.
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What do you think will happen to China hereafter, Prof. Endo?
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Japan is most concerned about China-Taiwan relations. What do you 40
think about the possibility of Chinese military action pursuing the41
integration of Taiwan into One China?
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mandate of a Security Council resolution. In this regard, the UN
Charter, as devised, could even be seen as preventing them fromstarting a war.
It is true that nations are divided into three groups on this Russian
invasion: Russia and China and a few others supporting it, Japan, theUS and Europe opposing it, and developing nations murmuring. I
think there must be strong antipathy among the nations in the thirdgroup, called the Global South, against the Western nations’monopolizing of political correctness despite historical events suchas colonization, racial discrimination and the Iraq War. Each nation inthis group also has been pursuing its own national interest withpriority placed on a free and independent attitude. For example, India
has been importing cheap oil from Russia, loyal to its long history ofa nonalignment policy.
However, it is also true that there was extensive support for the
UN General Assembly’s initial decision that Russia should get out of
Ukraine and stop its invasion: 141 agreed and only five opposed,with 35 abstentions. This implies that concerns, criticism andcondemnation of Russia’s invasion were widespread. Criticism of thewar is shared by many national leaders including Indian Prime
Minister Narendra Modi or Turkish President Recep Erdogan. In
particular, after having had to face the risk of a nuclear attack or
incident, more nations are becoming expressly concerned about thewar. The three group members are thus not necessarily fixed andwith widespread criticism against the war there have been changes
among group members little by little, reflecting it.

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Endo: In International Relations studies, we are inclined to think
about war from three perspectives: international, national andindividual. In international dimensions, it is certainly true that theRussians are concerned about NATO expansion reaching Ukraine
and accommodating facilities and equipment to defend missiles in
Poland, demonstrating power close to Russia’s border. In this light,
there is some international criticism that the West has threatened
Russia too much with NATO expansion. However, at the same time,
there is another view that the West has threatened Russia too little.
The administration of President Joe Biden, following the trend of US
withdrawal from overseas conflicts, stated that it would not sendsoldiers to Ukraine. Within this perspective, it could be seen as a
failure in deterring Russia, but whether a US threat could make Putin
give up his invasion would remain a big question.
Lastly on international dimensions, we should not forget about the
impact of the collapse of empires that has not been much talked
about. A collapse of a big empire could have a durable impact thatlasts more than one generation. Empires of the past tell the same
story: the Russian Empire, German Empire, Austro-Hungarian
Empire and Empire of Japan. Some Russians still have traumatic
feelings about the collapse of the Soviet Union in 1991 without agunshot having been fired.
Some groups in Russia have been eager to restore the Soviet
Union, but with independent states, new national borders and new
ethnic allocations. This war was provoked by such historicaldevelopments from the impact of the collapse of the empire. The
wars that Russia started after the Cold War took place in “postSoviet space”, i.e. the former Soviet Union’s territory. All of themwere initiated with little regard to the West’s intentions and actions.
In the national state dimensions, there have been contradictory
political developments: democracy versus authoritarianism or
dictatorship in the post-Cold War period. Putin had the impressionthat waves of democratization were reaching Russia, as even Ukraine
was democratized after the waves of democratization in Eastern
Europe and Arabic nations. He would most likely consider thesewaves as US-inspired anti-Russia movements. Some experts on
Russia refer to the Rose Revolution in Georgia and the Orange
Revolution in Ukraine around from 2003 to 2004 as decisive
incidents which made Putin convinced of an American conspiracy
behind the events.
Meanwhile, Russia itself has been becoming a more dictatorialstate and there are fewer obstacles to conducting an invasion within
its national politics. This is certainly Putin’s war. He always desired

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Takemori: I think the long-term energy issue affected Putin’s actions 21
as well. He became Russian prime minister in 1999 and president in 22
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2000. In the era of Mikhail Gorbachev as president, energy prices
had been low, but after 2000, in particular after China’s entry into the 24
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WTO in 2001, with its economic growth accelerating, energy prices
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have been rising with China’s high growth rate. This was, I believe,27
the tailwind enabling Putin to win domestic elections continuously.
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American shale oil production has increased since around 2012.
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The primary reason was rising oil prices. The background was that30
China’s 4 trillion yuan macropolicy package to stimulate the31
economy after the Lehman Shock pushed up energy demand. The
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second reason was the US zero interest rate monetary policy that33
made high-cost investment in shale oil profitable. Shale oil
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production was generally unable to meet the cost without low
interest rates and high oil prices and those two conditions were met 35
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then and encouraged US shale oil production to jump up.
However, OPEC tried to inflict damage on the US shale oil industry 37
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by its decision to refrain from oil production cuts, and that resulted
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in lowering crude oil prices to $30 in 2016. In 2014 when Russia’s
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Crimea invasion took place, crude oil prices had already started to
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fall. Putin may have thought that unless he took steps to stir up
patriotism among the Russians, his popularity would fall with the fall 42
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of oil prices.
to restore the former Soviet Union’s prestige and spheres of interestand has attempted to take advantage of every weakness of the West,such as with the energy dependence. He thought Biden would not beable to produce any counter reaction against Russia since the wholeWest itself has seemed weaker, exemplified by the withdrawal fromAfghanistan, and there is also the business of the US-China
confrontation. What is interesting about Putin is that he is not simply
trying to restore the former Soviet Union’s spheres of interest but
also trying to get revenge on the US by imitating the American logic
used for justification of its resort to use of forces, which the
Bulgarian philosopher Ivan Krastev referred to as “emulation asrevenge”.
To be more specific, Russia invaded Ukraine, saying that it has
been developing weapons of mass destruction and had also
committed genocide, like the Nazis, and that Russia would have to
make a humanistic intervention and change the regime. Showing off
the American logic itself used by the US government to start a war
against Iraq and others, it revealed the Americans’ ruthlessness. Thisis such a malicious way to start a war.

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Takemori: He must have thought it would be the last chance toconsolidate his power, as the global energy shifts toward renewables
would one day wipe out demand for fossil fuels.
Terazawa: I think President Putin decided to invade Ukraine at thebest opportunity to take advantage of the weakness of the West in
the energy domain. It was a moment when the West was faced withthe biggest vulnerability in energy supplies with prices rising,underinvestment in fossil fuels and lack of excess supply capacity.
Also from a long-term perspective, Russian gas leverage is foreseen
to decline under the progress of decarbonization. With thisbackground, he thought it would be a vital moment for him to restore
the glory of the Russian empire while he is still alive and mark his
name in history.
Even with the sanctions of the West, Russia can continue the war
because its revenue from energy is unchanged as non-Western
nations continue to buy its energy, and even at discounted prices
Russian energy revenue has remained unchanged. This is the reason
why the West must continue investment to achieve less dependency
on Russian energy. However, under pressure from global warming,
how much it can do so is uncertain. That is our concern.
Endo: Putin would think so far this war has been to a certain extent
successful in destabilizing the energy situation in the West.
Terazawa: It may be successful in the short run, but without thetechnologies of the West it would be difficult in the long run todevelop oil and gas fields. I think this demerit would be bigger than
the short-term merits. So this war will never have been a gooddecision for Russia as a country. It can be rationalized only in termsof what Putin could do to restore national glory in his lifetime.
Toyoda: Prof. Takemori, do you think the economic sanctions on
Russia work well or not?
Takemori: Economic sanctions target Russian banks to stop theirinternational settlements, in other words they aim to make it
impossible for Russia to buy products made by the West with its
dollar income from energy exports. But at the request of European
nations heavily dependent on Russian energy sources, energyrelated payments were eliminated from the coverage of sanctions onexport payments to Russia. This made sanctions as a whole
ineffective, as Russia does not export manufacturing products and
10 Japan SPOTLIGHT • January / February 2023

its dollar income consists mainly of energy exports. In addition,
Russia can conduct transactions in currencies other than US dollars
with China or India. So the sanctions had little effect on its earningincome in foreign currencies.
On the other hand, it works well on the purchases of goods fromthe West. If Russia tries to buy massive amounts of weapons or
machines, once these transactions are revealed they can be stopped.
At this moment, the Russian army’s weapons are becoming obsolete
and fewer spares are available. This is certainly the result of
sanctions and the shrinking Russian economy.
The US is applying this lesson in its policy toward China. It has
already promulgated acts to stop providing China with newtechnologies in order to make Chinese semiconductor products
obsolete. Russia’s current economic power or military power isgradually deteriorating by failing to receive new products or
technologies from the West. Likewise, the US is promoting a policy
to prevent China from buying advanced technologies and goods fromthe West. This will be the core strategy of the West toward China in
the era of the “New Cold War”.
Terazawa: In addition to its inability to get new technologies, thesanctions are working well in creating a tremendous outflow of thebest and brightest in Russia overseas. Investment flows into Russia
could be discouraged as well. These could have a strong negative
effect on the Russian economy in the long run, though sanctions on
the energy industry do not seem to be working well in the shortterm.
This could apply to China as well. It is not only about rejecting
technology transfers to China but also whether China’s best andbrightest studying abroad will come back to China or stay abroad toescape its authoritarianism. This will be a key to China’s long-term
development. For the US to contain China, it will be important to
attract those best and brightest to the West.
Toyoda: Coming back to the issue of energy, I would like to ask Mr.
Terazawa if we could truly give up upstream investment in fossil
fuels.
Terazawa: I do not think we can stop upstream investment abruptly.
Thinking about newly developing countries and also many “Hard-toAbate Sectors” where decarbonization would be difficult to beachieved, there will still be stable demand for fossil fuels. As we still
have a long way to go before 2050, without investment to sustain

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robust demand for fossil fuels during this period, our energy market
would become very unstable and with some external shocks, energy
price hikes would occur easily.
In addition, in the light of the global environment, what needs tobe mitigated is not fossil fuels but CO2. Thus, decarbonization offossil fuels such as by creating blue hydrogen or blue ammonia fromfossil fuel gas or elimination of CO2 emissions from fossil fuels by
CCS (Carbon dioxide Capture and Storage) would make it possible
for fossil fuels and decarbonization to co-exist consistently.
From the perspective of promoting less dependency on Russianenergy as well, I think the need for investment will increase, as
elimination of energy imports from Russia will need equivalent
investment even with the unchanged global energy balance.
Underinvestment in fossil fuels has been concentrated on certain
regions or energy companies. For example, European and Americancompanies have been particularly underinvesting with pressure fromtheir shareholders. In contrast, Middle East countries or state
enterprises have been investing more. Thus, contrary to the common
view on the Middle East, its influence has been rising rather thandeclining.
In total, I think we will need to maintain investment in fossil fuels
not only from the need for upstream investment in them to achieve astable energy market but also from the need to achieve lessdependency upon Russian energy as well as less dependency upon
the Middle East or state enterprises for fossil fuels.

What Is to Be Done Hereafter?
Toyoda: Lastly, shall we discuss about what to do hereafter? On the
global economy, the economic outlook for 2023 by the IMF is very
pessimistic. National government expenditures have been increasing,as well as fiscal deficits. Prof. Takemori, what do you think is to bedone to achieve both goals consistently, getting the economy backon a robust growth track and budget sustainability?
Takemori: I think the main concern in predicting the economy is how
this war will come to an end. On April 29, 2022, Jurgen Habermas, a93-year-old German philosopher, wrote an article in the German
paper Suddeutsche Zeitung in which he said: “It was the lesson our
generation learned that no one would be a winner in a nuclear war.”
This means that we cannot force a country which has nuclear
arsenals to surrender; the only possibility is to seek a compromisewith the country. Of course, the key issue of the current war iswhether Ukraine can regain its territory deprived by Russia, but at
the same time this war matters in terms of global security. Thereneeds to be a compromise in this regard. A compromise might
emerge in 2023 when the West may try to mitigate its energy
constraints, though there would be an enormous cost with Putin’s
victory in the war of energy. Without an end of the Ukraine war, I
think the global economy will not be stable. After the end of this war,
we will face another challenge provoked by China. China cannot
hereafter update its high-technology goods or enhance the quality of
those goods, as the high-tech industries in the West will stop
providing China with their new semiconductor technologies from2024. This will push up the price of electronics products in general.
It is true that China has been providing cheap and high-quality goods
so far, but this will not be possible anymore. Production in South
Korea and Taiwan would not make up for China’s production decline.
It would have a negative impact on the global economy. With these
two uncertain factors of Russia and China, short-term economic
predictions are extremely difficult.

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Endo: How this war ends will be determined by two factors: the20
current cost of the war and future risks. Some suggest finishing the 21
war to minimize the current cost, but others insist on continuing it to 22
get rid of the seed of a possible war in the future. There is a fight23
between the two. Ukraine is now in the second category. I agree with 24
Prof. Takemori in saying a compromise might be necessary, if
25
eagerness to continue the war among the West proves limited.
26
The biggest risk in thinking about how the war may end would be 27
the US. If former President Donald Trump had won a second term,28
as some speculate, the US may have left NATO. If the Russian29
invasion had happened after the US left NATO, NATO would have30
been powerless and Ukraine could not have continued to resist.
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Russia, in reality, has not won many wars by its aggression and it
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has succeeded only in pushing out Napoleon and Hitler. It has been
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tough in trench warfare to protect its acquired pieces of land. In this 34
war as well, it will try to protect what it has already taken by trench
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warfare. In such circumstances, how long the West can continue to36
supply weapons to Ukraine or support it wholly will be a key
37question. Though Ukraine is now still in high spirits, if the West’s
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support declines I guess there could be a moment in the future when 39
it will have to think about a ceasefire, which might mean stopping40
short of regaining its entire territory.
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This is an unlawful invasion. There will be an impact on China42
Taiwan relations, though Taiwan is in some ways different from43
Japan SPOTLIGHT • January / February 2023

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Ukraine, in particular as China considers the issue of Taiwan as adomestic political question. The important lesson of the Ukraine war
is first of all that nations with the intention and power to change thestatus quo and with greater authoritarianism could take extremely
risky political actions. In spite of the long history of attempts to makewars of invasion unlawful, we cannot exclude the possibility of wars
under such circumstances. This posture could be applied to China
under Xi, with its intention to change the status quo, referring to thepossibility of resorting to weapons, and with its deepening
authoritarianism.
However, it seems to be quite a challenge for China to invade
Taiwan in terms of its military capacity. The Chinese army cannot
easily pass over the 100-kilometer long Taiwan Strait with its strong
oceanic current. The Russian army has struggled to pass over only ariver. Missile attacks would be possible, but they would result inincreasing Taiwanese readiness to resist. The Ukraine crisis musthave also given Beijing a simulation opportunity in examining theWest’s reaction to unlawful war or invasion, namely their restored
unity, though in reduced size, economic sanctions against Russia
and continuous support for Ukraine. Judging from theseobservations, I think China’s invasion of Taiwan is most unlikely inthe near future. We must be well prepared for it, though, since China
has never given up its intention to regain Taiwan, and with its greater
power and deeper authoritarianism, this risk cannot be excluded.
Toyoda: Assuming that economic sanctions against China are
possible in the future, will Japanese companies start thinking about
the need for decoupling. Can you comment on this point?
Endo: There have already been developments in businesses invested
or settled in China escaping to third nations following the deepened
conflict between the US and China. It is understandable to see anincreasing number of Japanese companies engaged in such risk
assessment with the start of the Ukraine war.
For the time being, a Taiwan invasion will not happen, I suppose.
But there is a possibility that the US, through thoughtless action,
might trigger a crisis. The US has occasionally given wrong signs to
its enemies. A long time ago, on the occasion of the Korean War,
State Secretary Dean Acheson drew what we call the Acheson line
between the Korean Peninsula and the Tsushima Strait, defining theregion inside the line as definitely defended by the US army. Thissign helped to make Kim Il-sung, then the leader of North Korea,
decide to start the war in the Korean Peninsula.
12 Japan SPOTLIGHT • January / February 2023

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Takemori: Russia has been considering “time as their enemy” overthe long term as its economy, depending on only fossil fuels with the 11
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progress of decarbonization, is gradually shrinking. In contrast,
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China has been thinking that “time would support China”, since astime goes by the situation becomes more favorable for it as it could 1415
keep competitiveness in its manufacturing sectors with its
16technology catching up with the West as well as maintaining cheap
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wages.
The American strategy to contain China is to stop this catching-up 18
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process by ceasing to provide advanced technology and aiming to20
reduce its military capacity and eliminate the threat of all the hightech industries in the world being monopolized by China. To achieve 21
22this, semiconductors are under export control and chip technology
as well as human resources and services related to supercomputers 23
and AI are subject to export bans now. For example, ASML, a Dutch 24
25company with lithography technology vital for producing nanosemiconductors, is not going to be involved in business with China. 26
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In the domain of supercomputers, China cannot be the recipient of28
NVIDIA, chips necessary for AI, and thus its technology would stop
29
improving.
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Japan now considers China as an important part of the global
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supply chain. But Japan will have to think about withdrawal from32
business in China or relocation of its supply chains, as
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semiconductors built in components provided by China would
become more expensive and less high-quality. This may not happen 34
immediately but in five years Japanese companies will be faced with 35
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a question of whether they can maintain Chinese components as a37
core part of their supply chain.
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Toyoda: To pursue both climate change mitigation and energy
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security in a balanced way, the global commitment to restrict the41
global average temperature rise to 1.5 C in comparison to the pre42
Industrial Revolution age may be difficult to achieve. Mr. Terazawa,
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what do you think about this?
On the Gulf War as well, the US ambassador to Kuwait did not say
clearly “No” to Iraqi President Saddam Hussain and Saddam thought
he could invade Kuwait. With such confusing signs from the US or
no clear sign from the US president, China may think this would be
an opportunity for invasion. A Taiwan crisis would be dependent
upon three factors: Taiwan’s willingness to resist, the US willingness
and capacity to intervene, and also China’s willingness and capacity
to change the current situation.

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Terazawa: This 1.5 C goal does look difficult to achieve.
Furthermore, in responding to the Ukraine crisis, coal-fired powerhas been increasing, which will make it even more difficult toachieve. Meanwhile, in terms of the energy flow argument, European
nations are now ready to promote decarbonization further in dealing
with the Ukraine crisis to consolidate energy security. The emerging
economies and developing economies are also ready to promoterenewable energy. Therefore, though it is extremely difficult toachieve carbon neutrality in 2050, it is also true that expansive use ofrenewable energy and decarbonization will proceed across the world.
Taiwan committed to stop utilizing nuclear power in 2025 and also
to reduce coal-fired power. It would increase use of renewableenergy. But due to its constraints in using renewable energy, it will
have to use more natural gas and increase use of gas-fired power.
The Taiwan example shows us that we will need fossil fuels in
pursuing the option of no use of nuclear power while pursuingdecarbonization. We will need to continue necessary investment infossil fuels. Without nuclear power, the goal to achieve carbon
neutrality in 2050 will be still more difficult to achieve. We need anational debate on nuclear power if Japan truly seeks for carbon
neutrality. Carbon neutrality and abandoning nuclear power cannot
be consistent for Japan.

Building Japan’s Future
Toyoda: Finally, could all of you give your brief recommendations onwhat Japan should do from now on?
Endo: We are seeing the emerging reality that the UN, the only
critical public assistance system, does not work well in the domain
of international security. On the possible conflict with China,
including territorial issues like the Senkaku Islands, the UN system
will not function well either, as it is a permanent member of its
Security Council. If it does not work, we should seek mutual
assistance. To the extent that the US remains a reliable partner, thismutual assistance system should be strengthened. However, thismutual assistance system may occasionally not work well either
depending upon US domestic politics. We will need self-help in thiscase to some extent including increased defense expenditure.
We will need to examine seriously how limited resources, financial
or human, are to be wisely allocated, according to well-defined
purposes. We should pursue well-focused and functional self-help. I
believe we should put greater emphasis on defense capabilities,

instead of a deterrence strategy with middle-range missiles equipped 1
with conventional warheads which may not function, and strengthen 2
our defense of the Southwest Islands.
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Takemori: Most Favored Nation and National Treatment, two basic
5
concepts of the WTO, are dead. Russia and China are now
6differentiated. We are seeing friend-shoring, a concept well accepted. 7
Instead of the WTO rules, we see more discussion on geopolitics. I
8am glad to see in Japan discussion on fiscal sources of increased
9defense expenditure finally emerging after a long time. I do not think 10
it is a bad idea for Japanese industries to consider corporate taxes as 11
fiscal sources for increased defense expenditure, because we can12take advantage of increased defense expenditure for industrial policy 13
to raise the potential of Japanese science technology and military
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technology.
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Hereafter, the Japanese government must think about what16
industrial sectors could contribute to enhancing national security and 17
raising international competitiveness. Wasting budgets cannot be
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allowed. We have to transform our fiscal expenditure to maximize its 19
benefits.
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Terazawa: It is extremely difficult to achieve both goals of mitigating 22
global warming and strengthening energy security. It is so in
23particular for Japan. We Japanese seem to have spent so much time 24
and energy discussing each advocate’s preference or dogmatic
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arguments such as “Which is better, nuclear power or renewable
26
energy?” But we will need to face reality and seek realistic solutions 27
at this stage to engage with these two big issues. There are no28
exceptions to this among the government, industries and the people. 29
So whether you like it or not, we will need to utilize all energy
30sources, renewable energy, energy saving, investment in fossil fuels, 31
nuclear power, etc. Otherwise, we cannot achieve both goals.
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Taking advantage of the Ukraine crisis as a wakeup call, the33
government, industries and people of Japan, under strict economic
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and natural resources constraints, will need arguments focused on
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reality to produce solutions rather than dogmas.
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Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with the42
assistance of TapeRewrite Corporation.
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Japan SPOTLIGHT • January / February 2023

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