Why is Japan Worried About Australia’s Energy Policies, and Will the Lights Go Out in Tokyo?
Economy Featured Global News News Politics

Why is Japan Worried About Australia’s Energy Policies, and Will the Lights Go Out in Tokyo?

Security, or lack thereof, can be a powerful motivator.

In the case of the latter, the term fight or flight pretty much sums up the human impulse to act when forced into a tight corner and left vulnerable.

Perhaps it is for those reasons that one of Japan’s corporate titans this week took the extraordinary step of delivering an incendiary speech to a high-powered group in federal parliament.

In remarks that reportedly left observers stunned, Inpex boss Takayuki Ueda warned that Australia risked undermining world peace by “quietly quitting” the liquefied natural gas business.

He was backed by Japanese ambassador Yamagami Shingo, who said Tokyo might be a city that never slept, but its lights would go out if Australia stopped supplying Japan with energy.

So, are the warnings real and how much stock should we put in them?

How secure are Japan’s resources?

In the words of acclaimed American energy writer Daniel Yergin, Japan has long viewed the issue of resource security differently from most developed countries because it is “virtually devoid of natural resources”.

Up until the 1970s, the miracle of Japan’s post-war economic recovery had been largely fuelled by oil imports from the Middle East.

“But the oil shocks of the 1970s, which threatened to undermine Japan’s post-war economic miracle, were deeply traumatic,” Yergin wrote in his 2011 book The Quest.

Despite its lack of natural resources, Japan’s economy is the third biggest in the world, with a gross domestic product of more than $US5.5 trillion ($8.2tn).

The country is a manufacturing powerhouse and is home to many of the world’s leading automotive and high-tech brands.

It is also home to 125 million people who enjoy some of the highest living standards and longest life expectancies in the world.

For all this economic success, Japan is almost totally dependent on foreign countries for the natural resources it needs to underpin such prosperity.

Nowhere is this more evident than with energy.

Japan has few fossil fuel resources of its own and its geography and location make it unsuited to the easy adoption of renewable energy.

“Unlike the United States, Japan … could not even dream of energy independence,” Yergin noted.

What does Australia supply Japan?

If Japan’s economic growth after the horrors of the Second World War was something of a miracle, then Australia’s role in the transformation was almost as compelling.

In 1957, prime minister Robert Menzies struck a historic commerce agreement with his Japanese counterpart, Nobusuke Kishi, that would pave the way for closer trade ties between the two countries.

That the deal was struck at a time of trade protectionism and tariff walls was one thing.

That it was struck in the shadow of a global conflict in which Australia and Japan had been bitter adversaries was something else entirely.

Yet it would lay the foundations of a trade relationship that helped enrich both countries.

Not long after deal, shipments of Australian iron ore were sent north to feed the Japanese mills turning out the steel required for the country’s mass rebuilding and urbanisation.

In doing so, Australia would open up an industry that has grown to become its most valuable source of export income.

A couple of decades later, in the 1980s, Japan would be the cornerstone of another mammoth Australian industry — this time for super-chilled gas (or LNG) shipped on giant tankers.

Throughout it all, Australia has been a consistent supplier of coking and thermal coal to Japan.

According to Mr Yamagami, Japan relied on Australia to provide 70 per cent of its coal imports, 60 per cent of its iron ore and 40 per cent of its gas.

What are the Japanese concerns?

Given the lack of its own natural resources and its heavy dependence on Australia as an exporter, Japan is perhaps more attuned to potential supply risks than any other advanced nation.

It’s what drove the development of Australia’s iron ore industry and it’s what created the LNG industry, which was born when Japan agreed to buy the output from the North West Shelf project off Western Australia’s north via long-term take-or-pay deals.

More recently, Japan has sought extra security over its access to energy resources in Australia by investing more directly in LNG projects across the country.

The flagship of its endeavours is Inpex’s $60-billion Ichthys facility, which takes gas from waters off WA’s north before piping it almost 900 kilometres to Darwin, where it is turned into LNG.

From Japan’s point of view, Ichthys is no ordinary project.

Apart from the fact that it meets about 10 per cent of Japan’s LNG needs, Inpex is also 21 per cent-owned by the Japanese government itself.

What’s more, Tokyo retains a so-called Golden Share, which gives the government the power to block any foreign takeover of Inpex.

In that context, Japan has been watching with growing trepidation the increasingly frequent and forthright interventions by Australian governments into the gas market.

From a relative embrace of gas as recently as the 2000s, governments of all stripes and in most states have been cracking down on the behaviour and growth plans of the industry’s players.

Many of the decisions have been motivated by environmental concerns about the effects of gas production.

Lately, they’ve been sparked by outrage over skyrocketing gas prices for consumers.

There have been temporary and permanent bans on onshore gas exploration from Tasmania to New South Wales, steeper hurdles for project approvals and potential curbs to exports.

The price caps and reasonable pricing provisions introduced in December – combined with the safeguard legislation passed this week – have sent the fears of Japanese observers into overdrive.

It’s what prompted Japan’s ambassador to Australia to express disquiet this week.

“Japan and Australia have grown – and continue to grow – together,” Mr Yamagami told the crowd at parliament.

“You only have to look at the vibrant streets of Japan’s never-sleeping capital.

“It’s hard to imagine the neon lights of Tokyo ever going out.

“But … this is exactly what would happen if Australia stopped producing energy resources.”

Will the lights go out in Tokyo?

It seems unlikely that a country as rich and sophisticated as Japan would simply let the situation in its biggest city deteriorate so much that its energy supplies were jeopardised.

For starters, Japan has a massive fleet of nuclear reactors that, until they were shuttered in the wake of the Fukushima meltdown in 2011, generated almost a third of the country’s power supply.

There are plans, which could feasibly be fast-tracked, to gradually bring back online a number of those reactors to fill any void in the coming years.

Moreover, Japan has the trade nous and deep pockets to buy energy from whoever is selling it and can send it on a ship.

To that extent, rather than the lights in Tokyo going out, a more plausible risk was outlined by Inpex boss Mr Ueda, who said Japan would have to find its gas and coal elsewhere.

This, he said, would have “sinister” and unintended consequences for the global security order by strengthening the hand of potentially hostile states such as Russia, Iran and China.

“I hope this point is obvious to all of you and that you appreciate that this outcome would represent a direct threat to the rules-based international order essential to the peace, stability and prosperity of the region, if not the world,” Mr Ueda said.

Realistically, the comments from the INPEX chief are hyperbolic.

It would also be worth keeping in mind that Mr Ueda is an investor with a lot of money on the line and may, to a certain extent, be talking his own book.

Federal Resources Minister Madeleine King, while not directly addressing the criticism in Mr Ueda’s remarks, stressed that Australia would remain a stable and reliable energy partner for Japan.

This week, she also reiterated the government’s commitment to the gas industry and the part she claimed it would play “for decades”.

But Ms King did not resile from the Government’s decisions, either, arguing urgent action had been required to deal with the rampant energy price rises slamming Australian households and businesses last year.

“Reforms to Australia’s energy markets balance the need to guarantee sufficient domestic gas supply while also safeguarding Australia’s global reputation as a stable and reliable supplier of energy to our export markets,” Ms King said.

“Australia will always remain a reliable supplier of energy to Japan and a safe destination for foreign investment.”

Source : ABC