Limited Options Tie Japanese Government’s Hands Dealing with Looming Oil Shock

April 5, 2022|Energy Prices

Soaring LNG and crude oil prices, accelerated by Russia’s war with Ukraine, are starting to reverberate throughout the economy, inflicting a high toll on Japanese households and nearly all areas of commerce and industry. Some experts already refer to this situation as the Third Oil Shock, with the first such global energy shock having taken place in 1973, almost half a century ago.

So far, state subsidies have been the main measure to combat energy-driven inflation. Last week Prime Minister Kishida ordered yet more of the same in an effort to shield consumers and seniors, in particular, from higher food bills. But it’s increasingly clear that this won’t be enough and bolder steps will be needed in the coming months, likely tying up more of the national budget, weakening the yen, and likely delaying the energy transition.

Unlike the 1970s, Japan’s government, as well as those of its western allies, are more experienced and in a better position to tackle the negative fallout from rapidly rising energy prices. However, many of the tools available to the state and the monetary authorities in Japan are already deployed or even tapped out after three years of dealing with the Covid-19 pandemic as well as long-term structural issues.

With only three months or so before upper house election the premier will be walking a political and economic tightrope. Deft handling of the energy dilemma could help Kishida’s administration secure a strong political platform for years. How much control the government can exercise over energy markets will be severally tested in the next three to four months.

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