The world’s energy landscape is changing rapidly. The emergence of new producers and consumers, regional instabilities, plummeting energy prices, the arrival of disruptive technologies and new climate commitments are all shaking up energy diplomacy and market balances. But who is gaining and who is losing from this ever-evolving panorama? And what are the implications for Europe?

This series of analyses will examine the main strengths and weaknesses of the key players in global energy geopolitics. The aim is to assess the causes and consequences of the ongoing shifts in geostrategic power balances, track energy sector transformations and highlight best practices. 

This fourth analysis focuses on Japan, the world’s third-largest economy and second-largest net importer of fossil fuels.


Five years ago, the Fukushima disaster grabbed the world’s attention and sympathies. In addition to struggling with the direct impact of the catastrophe, Japan was forced to suspend most of its nuclear reactors – which generated more than a quarter of its power – and reconsider its entire energy strategy. The nation turned to expensive fossil fuel imports as a temporary replacement, causing energy bills to soar, putting under threat the country’s energy security and economic competitiveness, and hindering progress on CO2 emissions reductions.

Five years on, the Japanese recovery is still off track. Energy prices paid by industry and households are among the highest in the world. And despite recent efforts to restart nuclear power plants, safety challenges, legal barriers and public opposition remain strong. There are also legitimate concerns that Japan will not be able to meet its 2030 climate mitigation commitments, as progress in energy efficiency and renewable energy is unlikely to reach the speed and scale needed, while retrofitted and new coal-fired power plants are set to play an increasingly important role in the future energy supply.

But in a new push to forge a more lasting solution, Japan has taken unprecedented steps to deregulate its energy markets. If done properly, the move could reduce energy bills, prevent future power shortages, support renewable energy deployment, and shake up the technological landscape.

Can Prime Minister Shinzō Abe’s reforms materialise the much-hoped-for sustainable energy future and revive Japan’s position as a major player on the global energy scene? What lessons can be learned from the various energy strategies the Japanese government has tried since the disaster?

Energy resources scarcity

Japan’s biggest weakness is its own geography. The island nation is fatefully poor in energy resources, leaving it to rely heavily on imports. Japan consequently ranks as the least self-sufficient among the developed economies. It is the world’s largest liquefied natural gas (LNG) importer, second-largest coal importer, and third-largest net crude oil importer. Fossil fuel imports make up 85% of Japan’s energy mix, costing up to $40bn per year.

Despite efforts to diversify energy suppliers, nearly 60% of Japan’s crude oil is imported from only two countries, Saudi Arabia and the United Arab Emirates; coal imports come primarily from Australia, while LNG is imported from Australia, Qatar, Malaysia, Russia and the US. Attempts have been made to tackle this energy security dilemma by exploiting surrounding offshore oil and natural gas deposits, especially in the East China Sea. Competition with China over exploration rights pushed both countries to agree in 2008 on jointly exploring four natural gas fields and equally investing in the Chunxiao/Shirakaba and Longjing/Asunaro fields, yet tensions, national propaganda and territorial claims have hampered any common project.

Territorial constraints have also hindered any possibility of developing a unified gas pipeline transmission system as an economical alternative to LNG imports. Despite recent discussions with Russia about a possible underwater pipeline from Sakhalin Island, off Russia’s far-eastern coast, to central Japan, the $3.5bn project is unlikely to be approved mainly due to seismic dangers affecting Japan.

Further efforts to review gas contracts, boost energy efficiency and increase the share of renewable and nuclear power in the energy mix are desperately needed if Japan intends to reduce its costly import reliance.

The legacy of Fukushima

Japan’s resource scarcity has always negatively impacted the country’s energy security, trade balance and economic competitiveness. Since the 1970s, this had been relatively well compensated for by nuclear power generation. The country was until 2011 the world’s third-largest producer of nuclear power, behind the United States and France. Japan could rely on its nuclear reactors for roughly 30% of its power generation, and had plans to increase this share to 40% by 2017 with the construction of a dozen new reactors.

The Fukushima accident then forced almost all fifty nuclear reactors to be shut down and pushed Yoshihiko Noda, who served a single year as Prime Minister after the disaster, to announce plans for a Japanese nuclear phase-out by 2040. Nuclear power generation dropped to a mere 1% of total electricity generation, replaced almost entirely by increased LNG, oil and coal imports and domestic thermal power generation. The expansion of fossil fuels in the energy mix – to a 95% share in 2013 – led to a sharp rise in electricity prices for consumers (30% increase for industry and 20% for households), higher government debt, an intensified trade deficit and significant revenue losses for electric utilities. This left the country’s economy in a deep crisis and stalled Japan’s efforts to cut greenhouse gas emissions.

In an effort to revive the stagnant economy and cut one of the highest energy bills in the world, Prime Minister Abe decided not to follow his predecessor’s example and opted instead to resume nuclear activity, albeit under more stringent safety standards. The industry largely backed this decision, and a reactor at Sendai power station was restarted in August 2015, despite perseverant legal barriers and huge public opposition. The government wants nuclear power to satisfy as much as 20-22% of Japan’s energy needs by 2030. The International Energy Agency (IEA) considers the goal as realistic, yet many analysts warn that only a limited number of reactors are likely to come back online due to safety, economic, political and logistical hurdles.

Japan’s nuclear restart is likely to have far-reaching consequences not only for the domestic economy, but also for global energy trade, with LNG exporters likely to be the biggest losers. A decline in Japanese LNG imports could result in a drop in international prices, pushing many export projects – including in western Canada, the US Gulf Coast and Australia – in financial limbo.

Japan’s ‘dirty’ finance

Coal has long served Japan as a cheap alternative to LNG for electricity generation. In its hunt for coal supplies, Japan became the world’s biggest financier of overseas coal projects.

It is estimated that between 2007 and 2014, the country invested roughly €17bn in coal power plants and mines abroad, mainly in Asia, with funds from Japanese credit agencies paid as bilateral loans. A pivotal role has also been played by the Japan Bank for International Cooperation (JBIC), a state-owned credit bank providing resources for foreign investment. The JBIC backed the construction of coal plants and invested in several coal facilities in countries such as Vietnam, India, Indonesia, Thailand and the Philippines.

Amid criticism from the international community concerned about the impact of such investment on global climate change mitigation, the Japanese government defended its bilateral loans as climate finance, arguing that by building more efficient coal plants it was helping developing countries to emit less greenhouse gases. But Japan will soon have to modify its strategy, as the Organisation of Economic Cooperation and Development (OECD) reached a deal last November to curb subsidies used to export technology for coal-fired power plants. Japan led the fight to block the deal, but ultimately had to concede.

Yet it does not seem that Japan is ready to change its pro-coal strategy at home. Around 41 new coal-fired power plants are planned to be built over the next ten years, and a new tax system will favour imports of coal over natural gas. These policies threaten to bind Japan even closer to coal for decades to come, leaving the country highly vulnerable to the impacts of climate change.

World frontrunner in energy efficiency

One energy ‘fuel’ that Japan has in abundance is energy efficiency. Ever since the oil crisis of the 1970s, the government has put a great deal of effort into energy saving as a way to compensate for its scarcity in resources. As a result, Japan now has one of the lowest energy-intensive economies and one of the most energy-conscious populations among developed countries.

Energy efficiency was of particular importance in the wake of the Fukushima disaster, when electricity capacity dropped drastically, threatening power blackouts. Much of the electricity savings were driven by a popular movement known as ‘Setsuden’ (energy saving), aimed at encouraging people and companies to conserve energy and adopt more sustainable practices. Measures included replacing high-consumption lighting with low-power LED lights, ‘thinning’ lighting by removing some bulbs, limiting air-conditioning, shutting off appliances instead of putting them on standby, cutting exterior lighting, changing working shifts to avoid peaks, or slowing down public transport. All this allowed Japan to drastically reduce power demand almost overnight.

Energy-efficiency standards for many electrical appliances and vehicles were created under the Top-Runner Programme in 1999, and further reinforced in recent years. The New National Energy Strategy and the Energy Conservation Frontrunner Plan to promote energy conservation were adopted in 2006, setting a target to improve the country’s energy efficiency by at least 30% by 2030 compared to 2003 levels.

Various financial and fiscal incentives have been put in place to encourage energy conservation and efficiency in industry, including sectoral benchmarks, tax incentive schemes, depreciation rates and low-interest loans. Large industrial companies are obliged to appoint an energy manager responsible for implementing an energy-efficiency plan for the company. Japan is also actively promoting demand-side management technologies and smart grids deployment, and is the world’s largest investor in smart meters. In the transport sector, Japan has introduced one of the strictest fuel-efficiency standards for passenger cars, and light and heavy-duty trucks, and its main carmakers – Toyota, Nissan and Honda – enjoy a reputation of world-leading energy-efficient car manufacturers. Yet the reputation of the Japanese car industry is now under threat due to recent revelations that Mitsubishi’s employees falsified fuel economy tests data for more than 600,000 vehicles in order to cut corners, in a new scandal following the Volkswagen case.

As a leader in energy-efficiency policies, R&D investment and innovation, Japan has also been actively contributing to international cooperation on advancing energy efficiency on a global scale and developing international standards through the International Energy Agency (IEA), International Partnership for Energy Efficiency Cooperation (IPEEC), New Energy and Industrial Technology Development Organisation (NEDO) and regional initiatives such as APEC, Asia-Pacific Economic Cooperation. It has also developed bilateral partnerships with its neighbours and major economies such as the EU and the US to boost capacity building and joint policy research, and to disseminate know-how thanks to joint demonstration projects.

Focus on energy R&D and innovation

Japan gives very high priority to research, development and deployment (RD&D), and its public spending as percentage of GDP exceeds that of all other major economies. According to the IEA, Japan has one of the world’s largest budgets dedicated to RD&D in the fields of nuclear energy, energy efficiency, renewable energy sources, smart grids, clean coal, and carbon capture and storage. The country is also the world’s leader in climate-related technological innovation, as indicated by the number of patents it holds, mainly in renewable energies, energy-efficient buildings and lighting, and electric and hybrid vehicles.

A big boost to clean energy technologies was given by the Cool Earth-Innovative Energy Technology Programme. Adopted in 2008, the initiative is the outcome of a study conducted by an investigative commission comprising key intellectual figures and promoted by the Ministry of Economy, Trade and Industry. The programme focuses on 21 key technologies whose deployment is expected to accelerate substantial global emissions reductions, and has allowed Japan to promote international and regional cooperation on R&D and innovative technology development, while maintaining its international competitiveness. On this basis, Japan and the United Nations Environment Programme (UNEP) in 2014 launched the ‘Asia Pacific Clean Air Partnership’, aimed at encouraging existing regional initiatives supporting common projects in order to curb air pollution in the area.

But as a result of two decades of economic stagnation, Japan has now visibly decreased its share of energy RD&D from 23% in 1990 to 12% in 2014. China is now poised to lead the world in total R&D spending by 2019 due to a recent surge in public investment in renewable energy RD&D. Further efforts will be necessary if Japan wants to stay at the forefront of energy research and development at the global and regional scale.

Regulatory overhaul of the power sector

In an unprecedented step to boost the country’s sagging economy, modernise the energy sector, lower energy bills, and advance efficiency and innovation, the Abe government has decided to embark on a major reform to deregulate electricity and gas markets. If done properly and in a coordinated way, the move could raise Japan to the rank of the world’s largest deregulated electricity market in history and a worldwide model to follow.

Japan has lagged behind the US and the EU on similar measures for more than 10 years, as its regional monopoly companies have wielded strong political influence preventing any progress on liberalising the sector. Yet increased losses in power companies’ revenues and persisting high energy prices have made evident the need to change Japan’s ‘business as usual’.

Japan’s electricity retail market was fully liberalised on 1 April 2016, allowing Japanese households to choose their power suppliers and opening up a ¥10tn (€81bn) market to newcomers. The unbundling of the transmission sector is scheduled for April 2020 and foresees to separate power grids from power plants in an attempt to ensure equal access to the power transmission network by all power suppliers. A bill revising the Gas Business Law, which calls for full liberalisation of the gas retail market by 2017, mandates that major city gas companies in Tokyo, Nagoya and Osaka separate their gas pipe management sections into new entities in April 2022. A new committee will be established to oversee transactions in the power and gas industries to ensure fair competition.

The package of reforms is expected to bring much-needed competition to gas and electricity markets that have until now been monopolistically operated by local companies. The competition would allow the sectors – which have suffered from inefficiencies in the absence of economic incentives – to become more efficient, driving down costs. New players from a wide variety of industries have already lined up, bringing with them innovative services and new business models offering discount prices combining cell phone, Internet and electricity services. New entrants could also boost technological innovation and improvements in smart meters, energy efficiency and renewable energy, affecting the world’s technological landscape.

Implications for Europe

The 2011 earthquake and disaster at Fukushima sparked widespread public concern over the safety of nuclear power generation and led to a re-evaluation of energy policies in many parts of the world. The European Council decided to mandate a review of the safety features of European nuclear reactors. The so-called ‘stress tests’ were applied to all nuclear power plants in the EU and an Action Plan was published in 2012 containing further measures to improve the safety of nuclear power plants. Meanwhile, member states’ reactions differed, ranging from Germany deciding to phase out its nuclear power plants, to the UK giving the green light to boost its nuclear capacity with a new Hinckley Point C project.

The similarities in environmental, political and economic situation offered fertile ground to build a close EU-Japan strategic partnership. Both like-minded partners face major challenges in view of improving energy efficiency, boosting competitiveness while addressing climate change and energy security issues, and dealing with growing competition from countries like China and India. Energy cooperation takes place as part of the EU-Japan Summit, EU-Japan Industrial Policy Dialogue, and Science and Technology Agreement.

Yet a comprehensive focus on clean energy is still missing from existing cooperation structures. The new Strategic Partnership Agreement and Free Trade Agreement currently under negotiation could be the game changers, opening a new era in EU-Japan relations. For Japan, there is a clear interest in learning from the EU experiences about the best policies to incentivise and scale up renewable energy deployment, and solutions to accommodate large quantities of clean energy sources into its market. Meanwhile, Japan emerges as an attractive clean energy market for European companies, including SMEs and large utilities, in particular thanks to efforts to deregulate and liberalise Japan’s energy market.


In the wake of the landmark climate change conference in Paris, where the world leaders from developed and developing countries agreed to take urgent measures to cut their CO2 emissions, Japan still faces a difficult choice between cheap but dirty energy and more expensive but cleaner alternatives. Japan’s struggle is further complicated by the scarcity of energy resources, public reluctance towards nuclear energy after Fukushima, and the sluggish economy.

As a trade-off between energy security, sustainability and affordability, Prime Minister Abe’s new energy vision foresees nuclear, coal and renewables (notably hydro) playing a growing role in the country’s electricity mix by 2030, complemented by increasing efforts to boost energy efficiency. The deregulation of the electricity and gas markets is also underway, promising to bring much-needed competition, cuts in energy bills and technology innovation.

The new strategy is likely to raise Japan’s profile on the global energy scene and trigger shifts in international energy diplomacy and trade. The country’s increased bet on coal for the years to come raises however serious doubts that Japan can effectively reduce its emissions in line with the Paris Agreement and achieve the G7 goal to phase out fossil fuels by the end of the century.

Further reading

IMAGE CREDIT: CC / FLICKR – NASA’s Marshall Space Flight Center

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