BY GILLIAN SAWYER and YURIY HUMBER
Japan is hardly short of research spending. The country ranks among the world’s leading economies for R&D intensity, with total expenditure equivalent to around 3.7% of GDP. Nor are Japan’s large energy companies strangers to new technology. Hydrogen, ammonia, synthetic fuels, carbon capture, batteries, offshore wind, blue carbon, space solar cells and sustainable aviation fuel all appear somewhere in their medium-term strategy decks.
The question is whether this activity is actually creating new businesses.
Much of Japan’s energy-sector innovation is supported, shaped, and de-risked by the state. METI, NEDO, JAXA, JOGMEC and other agencies provide the frameworks and budgets through which many early-stage technologies are nurtured. This reduces technical risk in a capital-intensive sector. But it also produces a ‘comfortable’ form of risk-taking: companies participate in many projects and keep their options open without committing to any of them.
The result is an awkward reality in which R&D and investment flows in abundance without any sense of urgency to reach profitability. It’s innovation without clear commercial ownership.
One sign that investors are unconvinced by this “Jack of all trades” model, among other issues, is that Japanese energy firms are valued poorly both for both present assets and future options. The market capitalization of Idemitsu Kosan, a top Japanese energy firm, is smaller than its quarterly revenue. Several power utilities trade at only a third of the value of the assets on their books.
In fact, among the 15 listed Japanese power, oil and gas companies reviewed by Japan NRG in early June, only one traded at or above book value. And while the reasons for that include low returns, the constrictions of a highly regulated market, and shrinking domestic demand, the sector’s generally weak capital efficiency – underscored by tepid innovation – is the key concern.
To meet Japan’s net-zero commitments while retaining energy security and competitiveness, Prime Minister Takaichi’s government seeks to mobilize corporate Japan to channel trillions of yen into the next wave of strategic GX initiatives. But firms trading below book value and struggling to show where future earnings will come from are poorly placed to make such bold commercial bets.