IEEJ © July 2018. All Rights Reserved.

26 July 2018
The 429th Forum on Research Work

Economic and Energy Outlook of Japan through FY2019
Decelerating growth and growing disquiets
YANAGISAWA Akira, M. Aoshima, H. Arimoto, Y. Yorita, D.M. Kim, T. Ohira, Y. Shibata, S. Suehiro
and K. Ito

Summary of economic and energy outlook [Reference Scenario]
Macro economy and production activity | Japanese economic expansion is slowing
down, and FY2019 will end four years of growth exceeding 1.0%
In FY2018, the Japanese economy will slow down its expansion of domestic and foreign demand and grow by
only 1.1%. The increase in energy prices will work as a downward force. In the absence of drivers to accelerate
development in both domestic and foreign demand, the GDP growth will further decelerate to 0.9% in FY2019.
Although the index of industrial production will experience its highest level since the Lehman shock, its year
over year expansion will diminish to about 1%. The trade balance will fall to a deficit of JPY1.2 trillion due to arise in energy prices in FY2018.

Energy supply and demand | Total primary energy supply declines from theFY2017, and CO2 emissions continue their decrease since FY2014
Total primary energy supply in FY2018 will decrease (-0.8%) due to a slowdown from the previous year’s higheconomic growth and severe winter. Although FY2019 will not react to the previous year’s winter weather, its
supply will decline by 0.2%, due to a slight slowdown of the economic/production activities combined withcontinued energy conservation. Natural gas supply reaches its lowest level since the Great East Japan
Earthquake, and for the first time declines for three consecutive years. The shift from oil and natural gas tonuclear and renewable energy continues.
The final energy consumption of FY2018 will turn to a decrease of 1.1%, updating the lowest level since thepeak in FY2000, and the overall decline in consumption for FY2019 will be 0.4%. Consumption in all sectors
for both years will decrease. The energy-related CO2 emissions will drop to 1,074 Mt in FY2019, or 13.1% lessthan in FY2013. The three main contributors to the reduction are a decrease in energy consumption (-5.9%)
and increases in renewable energy (-3.2%) as well as nuclear (-2.5%).

Energy sales | Electricity remains unchanged, city gas turns to a decrease, and thedecrease in fuel oil sales further expands in FY2018
Following the previous year’s electricity consumption growth, the sales for FY2018 remain unchanged. Sales
for lighting services will decrease due to the previous year’s severe winter, the penetration of solar photovoltaic
power generation and the increase in energy efficient appliances for lighting and in household electricappliances. Although space cooling demand will increase, sales for power services will expand at a slower pacebecause of the moderate growth of production in machinery industries. Electricity sales for FY2019 also remainunchanged in total from the previous year. Sales for lighting services will decrease slightly in a reaction to theheat wave of the previous summer, while sales for power services increase in response to the moderate
expansion of production activities.
Total city gas sales in FY2018 will turn to a decrease (-0.3%) for the first time in three years. Sales to industry
will increase because of a moderate growth in production and economic activities and because of fuelswitching of industrial furnaces and boilers. On the other hand, sales to households decline in reaction to theEconomic and Energy Outlook of Japan through FY2019| 1

IEEJ © July 2018. All Rights Reserved.

previous year’s severe winter. Led by growing sales to industry, total sales for FY2019 will turn to an increase(1.0%) and will update the record high. This increment will largely come from sales to electric utilities.
In FY2018, total fuel oil sales decrease by 3.1% due to a significant reduction in sales of heavy fuel oil C (mainlyto oil-fired power generation), a decrease in sales of gasoline (due to the penetration of fuel-efficient vehicles)
and a decrease in sales of naphtha (due to the periodic maintenance of more ethylene plants than the previousyear). Although FY2019 will experience increased sales of naphtha with less ethylene plants conducting periodic
maintenance and a steady increase of diesel oil, total fuel oil sales will decrease (-1.3%) for the seventh
consecutive year. This is caused by a continuous larger decrease in sales for gasoline and heavy fuel oil C (forpower generation).
Table 1 | Summary of Reference Scenario
HistoricalProjection

Year-to-year changes

FY2010 FY2015 FY2016 FY2017 FY2018 FY2019 FY2017 FY2018 FY2019

515.9 467.2
232.2 211.6
Oil (GL)
273.3
86.0
Natural gas (Mt of LNG equiv.)
184.7 190.1
Coal2 (Mt)
Nuclear (TWh)
288.2
9.4
3
111.1 149.0
Renewable electricity (TWh)FIT generation (TWh)
63.9
99.2
338.2 310.1
Final energy consumption4 (Mtoe)
158.7 146.9
Industry5
Buildings97.1
86.4
Transport
82.4
76.8
Petroleum products
176.0 157.9
Natural gas and city gas
34.0
32.8
Electricity
88.2
82.1
6(926.6) (837.5)
Electricity sales (TWh)39.28 39.91
City gas sales7 (Billion m3)
Fuel oil sales (GL)
196.0 180.5
4Energy-related CO2 emissions (Mt) 1,135 1,147(FY2013=100)
91.9
92.9
Crude oil, import, CIF ($/bbl)
8449
LNG, import, CIF ($/MBtu)
11.3
8.7
Steam coal, import, CIF ($/t)
11476
Coking coal, import, CIF ($/t)
17588Real GDP (JPY2011 trillion)
492.9 518.3
Industrial production (CY2010=100)
99.4
97.5
Exchange rate (JPY/$)
86.1 120.4
Cooling degree days
560
322
Heating degree days
1,077
875

Primary energy supply (Mtoe)1

EconomyPricesEnergy

2

463.5
205.1
88.1
188.0
17.3
149.5
108.7
310.1
146.4
87.8
75.8
156.2
33.6
83.4
850.5
41.53
176.9
1,128
91.3
48
7.0
81
111
524.4
98.5
108.4
431
966

465.3
202.6
85.6
190.7
31.3
165.0
118.3
312.1
147.5
89.2
75.3
156.3
34.7
84.1
863.2
42.48
174.7
1,112
90.0
57
8.5
102
146
533.0
102.5111.1
397
1,072

461.6
196.3
81.8
189.8
62.5
171.8
127.0
308.7
145.9
87.8
74.9
153.0
34.5
84.0
862.9
42.37
169.3
1,083
87.7
72
11.0
111
146
538.8
103.7
111.5
453
997

460.8
193.6
81.2
190.1
65.4
179.9
135.1
307.5
145.7
87.4
74.3
151.7
34.5
84.0
862.8
42.79
167.2
1,074
86.9
69
10.7
95
122
543.9
104.8
114.8
380
1,019

0.4%
-1.2%
-2.8%
1.4%
80.8%
10.4%
8.9%
0.7%
0.8%
1.5%
-0.7%
0.1%
3.3%
0.8%
1.5%
2.3%
-1.2%-1.4%
..
19.6%
20.5%
26.4%
31.8%
1.6%
4.1%
2.4%
-7.7%
11.0%

-0.8% -0.2%-3.1% -1.4%-4.4% -0.7%-0.4% 0.1%
99.8% 4.6%
4.1% 4.7%
7.3% 6.4%-1.1% -0.4%-1.1% -0.1%-1.5% -0.5%-0.6% -0.8%-2.1% -0.8%-0.6% 0.1%
-0.1% 0.0%
0.0% 0.0%-0.3% 1.0%
-3.1% -1.3%-2.6% -0.8%..
..
26.1% -4.0%
29.9% -2.7%
8.1% -14.4%-0.1% -16.9%
1.1% 0.9%
1.1% 1.0%
0.4% 2.9%
14.1% -16.2%-7.0% 2.2%

Notes:
1. Mtoe = 1013 kcal
2. Conversion factors for oil: 9,126 kcal/L; Natural gas: 13,043 kcal/kg; Steam coal: 6,139 kcal/kg; Coking coal: 6,928 kcal/kg until FY2012.
2. Conversion factors for oil: 9,145 kcal/L; Natural gas: 13,016 kcal/kg; Steam coal: 6,203 kcal/kg; Coking coal: 6,877 kcal/kg since FY2013.
3. Including large hydro 30 MW or more. 4. Estimated historical values for FY2017. 5. Industry includes non-energy use.
6. Figures in parentheses are old statistical figures. 7. Conversion factor: 1 m3 = 10,000 kcal

Economic and Energy Outlook of Japan through FY2019| 2IEEJ © July 2018. All Rights Reserved.

Renewable power generation | The FIT power generation capacity reaches 74 GW
at the end of FY2019
The revised FIT Act came into force in April 2017. As the act now seeks for promotion with more economic
rationality, the amount of approved capacity in FIT system is not expected to increase substantially. However,the facilities under construction and expected to start operation by the end of FY2019 will reach 73.9 GW
combined with existing ones, including 43.6 GW of non-residential solar PV. The power generation will expand
to 135.1 TWh in FY2019, equivalent to 13% of Japan’s total generation. The consumer burden expands inexchange for promoting renewable energy generation. Out of the total approved of 105 GW, 25 GW areassumed as expired capacities or capacities which are unlikely to start operation, leaving a maximum of 80 GW
to become operational. The cumulative amount of consumer burden for the entire purchase period will reach
JPY50 trillion, equivalent to a rise in electricity prices of JPY2,900/MWh – 12% for the residential and 17% for
the industry sector.

Topic | The uncertainty factors
1/ Nuclear power generation | Nuclear contributes significantly to achieving the3Es
We analyse the impact of the nuclear power generation using the 3Es approach – economy, energy (stablesupply) and environment. In the Reference Scenario, we assume a total of eleven nuclear power plants torestart by the end of FY2019 and in the High Case we assume additional five nuclear power plants. Between
the High Case and the Reference Scenario, total spending on fossil fuel imports decreases by about
JPY0.3 trillion, the self-sufficiency rate improves by 2.1% point, and the energy-related CO2 emissions decline
by as much as 13 Mt. Thus, the degree of utilisation of nuclear power generation has a significant impact of
the improvement of the 3Es.
Figure 1 | Effect of the nuclear power generation [FY2019, compared with the Reference Scenario]
Real GDP

200 Best Mixed Case

1.250
0-50

High Case35Low Case

MtCO2

JPY trillion-0.3-40-1.1

-60
-808
2.1

40-4-2.1

Unit cost of electricity

140.6

0.60-2010.4

12-0.3

Energy-related CO2 emissions
20-1.0
-1.5

0.0

0.3

0.0
-0.5

0.3

0.4

-0.8

Fossil fuel imports spending
0.5

0.8

-0.4

-35

1.1

JPY/kWh100166

JPY trillion

TWh150Self-sufficiency rate%point

Nuclear power generation-13-57

0.4
0.2

0.2

0.0

-0.2
-0.4

-0.2

2/ Oil Prices | A rise in oil prices is a headwind to the Japanese economy
If oil prices increase by $10/bbl from the Reference Scenario and LNG prices increase accordingly, the growthof the Japanese economy would be held back by 0.2%. The additional payments for oil and natural gas imports
could potentially amount to JPY2.7 trillion, which is larger than the tax revenue from a 1% VAT. Out of thisamount, households would bear JPY600 billion, equivalent to an increased annual payment for eachhousehold of about JPY10,000; electricity (JPY5,000) and gasoline (JPY2,500).

Economic and Energy Outlook of Japan through FY2019| 3

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Oil price increases cause economic slowdowns. A $10/bbl rise in oil prices would decrease each sales ofelectricity, city gas, and fuel oils and total primary energy supply by 0.3% to 0.4%.

3/ U.S. Trade Policy | Japan is more concerned over the imposition of tariffs onimported cars than over a U.S.-China trade war
If the U.S. imposes a 45% tariff on imports from China, as in President Trump’s statement during the presidential
election, and if China imposes the same rate in retaliatory duties, this would drop the U.S. economy and theChinese economy by 2.1% and 2.9% respectively. The U.S. and Chinese oil consumption would decrease by
0.2 Mb/d and 0.3 Mb/d, and natural gas would fall by 13 Bcm and 6 Bcm respectively. Although such actions
would push down the global economy by 0.6%, they would induce an incremental growth of 0.4% to theJapanese economy. This is because Japan plays the role of a substitute for both the U.S. and China ininternational trade. Japanese overall energy demand would increase a little due to the economic expansion,
but coal consumption would decline slightly due to lower steel production for the less exports to Asia.
On the other hand, if Washington imposes a 20% tariff on imported cars, the production of automobiles andparts in the U.S. would benefit, but the U.S. economy would shrink by 0.4%. This would negatively affect theglobal economy and the Japanese economy by 0.2% and 0.1% respectively. The drop also works as adecreasing pressure on the Japanese energy demand with electricity sales decreasing the most, because theautomobile manufacturing would be the starting point for the negative shock. By region, the impact on Middle
and West Japan could be the worse because of the importance of the automobile manufacturing and steel
industry (which supplies the automobile manufacturing) in those regions.
Contact: report@tky.ieej.or.jp

Economic and Energy Outlook of Japan through FY2019| 4