IEEJ: May 2012 All Right Reserved
Special Bulletin

A Japanese Perspective on the International Energy Landscape (85)

April 19, 2012

Japan’s Record High Trade Deficit of 4.4 Trillion Yen and Energy Problems
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan

Japan’s FY2011 trade deficit hit a record high of 4,410.1 billion yen, far exceeding theprevious high of 3,127.8 billion yen in FY1979, the Ministry of Finance reported in its preliminary
trade statistics on April 19. In the year to March 2012, Japan’s exports declined 3.7% from theprevious year to 65,281.9 billion yen and imports expanded 11.6% to 69,692.0 billion yen. FY2011
was the first fiscal year seeing a Japanese trade deficit in three years, since FY2008 when the trade
deficit stood at 764.8 billion yen.

Behind the substantial trade deficit that surpassed the level for FY1979 when crude oil
prices shot up amid the second oil crisis, there were major characteristic background factors
regarding both imports and exports.

Affecting Japan’s exports in the second half of FY2011 were a global economic slowdown
amid the European crisis and the Japanese yen’s appreciation. In the first half, a vehicle production
fall after the March 2011 Great East Japan Earthquake affected exports. The disaster, the world
economy’s slowdown and the yen’s appreciation had exerted significant adverse effects on Japan’s
FY2011 exports.

The substantial growth in imports resulted directly from energy problems. As is wellknown, Japan increased its dependence on thermal power generation to secure electricity supply
amid a decline in nuclear generation. As a result, fuel imports for thermal power generation
expanded substantially. Symbolizing the fuel import growth was a large increase in liquefied naturalgas imports. Japan’s FY2011 LNG imports swelled 12.65 million tonnes or 17.9% from the previous
year to 83.18 million tonnes. Since January, particularly, monthly LNG imports remained at as muchas 8 million tonnes, indicating that Japan has been making nearly maximum use of its LNG thermal
power generation capacity.

Meanwhile, crude and feedstock oil imports in FY2011 decreased 2.4% from the previous
year to 209.85 million tonnes. Overall crude and feedstock oil imports declined on a downward trend
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IEEJ: May 2012 All Right Reservedin Japan’s oil demand. But we must pay attention to the fact that the trend of overall oil imports has
been far different from that of oil imports (crude and fuel oil) for power generation. While importstatistics fail to specify oil for power generation, Japan’s crude and fuel oil consumption for power
generation in FY2011 scored a sharp rise of 12.56 million kiloliters, or 2.1-times the previous year,
to 23.53 million kl or 405,000 barrels per day. In the second half of FY2011, monthly consumption
almost or far more than tripled year-earlier levels. This apparently indicates that Japan rapidly
increased its dependence on oil thermal power generation as the “last resort”, as LNG thermal power
generation rose close to its capacity.

Energy problems’ impact on imports is not limited to quantitative changes in fossil fuelimports. FY2011 saw a crude oil price spike on growing geopolitical risks including the “ArabSpring” destabilization and the rising Iranian tensions. As a result, crude and feedstock oil imports,
though declining 2.4% from the previous year in volume, scored a sharp increase of 21.9% in value.
LNG import prices, which are basically linked to crude oil import prices in Japan, soared as crude oil
prices shot up. As a result, LNG imports posted a substantial increase of 1,853.0 billion yen in value
or 52.2% from the previous year to 5,402.2 billion yen. Import value increases for LNG, crude andfeedstock oil, and petroleum products aggregate 4,627.5 billion yen close to the overall trade deficitof the year.

This means a huge outflow of national wealth triggered by domestic and foreign energy
problems. An additional problem is Japan’s deteriorating performance regarding the return of suchoutflow. Amid the first and second oil crises where Japan saw a substantial outflow of national
wealth on a steep rise in oil import value, exports of Japanese products to oil-producing countries
receiving the outflow increased in a manner to lead some of the national wealth outflow to return toJapan. This means that Japanese manufacturers and exporters then had strong international
competitiveness. According to a report by the Financial Times on April 17, Japan has become more
vulnerable than earlier to oil price hikes and oil import value growth as the rate of return of national
wealth outflow has declined. On a historical average basis, Japan’s manufactured products exports
have allowed 43 cents out of every $1 in national wealth outflow on oil imports and the like to returnto Japan. In 2011 alone, however, the return was limited to 14 cents. This reflects the fact thatJapan’s benefits (national wealth return) from exports to oil-producing countries have declined as
China has remarkably expanded its export capacity and its benefits from such exports, thenewspaper reported.

The Japanese economy has been put into a difficult situation regarding international trade.
An important factor behind the situation is energy problems. As explained above, the urgent key
problem is the increase in fossil fuel imports to meet growing thermal power generation to make up
for a decline in nuclear generation. At the same time, an indispensable challenge for Japan is to2

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secure and provide electricity/energy supply stably and at competitive prices to maintain andenhance the international competitiveness of Japan’s economy and industry. Appropriate energy
measures are indispensable for the Japanese economy to compete for survival. This point may haveto be subject to the ongoing discussions on Japan’s energy policy reform.

Contact: report@tky.ieej.or.jp
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