Tatsuya Terazawa Chairman and CEO The Institute of Energy Economics, Japan
Message for May 2026
While the prospect of the Iran conflict is hard to predict, I would like to share with the readers the exposure and responses of Japan to the conflict.
<Main Points>
1. Heavy dependence on Middle East crude oil but ample reserves give time.
Japan’s dependence on Middle East crude oil was 94% in 2024, the highest among the major countries. The de facto closure of the Strait of Hormuz is certainly a serious concern for Japan. But at the same time, Japan had amassed 254 days’ worth of reserves, including five months’ worth as SPR managed by the Government, by the time of the attack on Iran on February 28. The high level of reserves has been one of the major pillars of energy security policies in Japan. PM Takaichi has been leading the world in releasing Japan’s reserves. The release of 45 days’ worth of reserves, including one months’ worth of SPR, started in March. PM Takaichi has announced that an additional 20 days’ worth of SPR will be released in May. Japan has been trying to import Middle East crude oil from the ports of Yanbu and Fujairah bypassing the Strait. Japan has also been trying to expand the procurement of non-Middle East crude oil from the US, Central Asia, and Latin America. With the ample reserves and through efforts to bypass the Strait and to procure non-Middle East crude oil, PM Takaichi has announced that Japan has secured sufficient crude oil until at least early next year. While the situation must be monitored closely, crude oil will not be the immediate concern for Japan for some time. Japan has the time until early next year for crude oil.
2. LNG is not a serious concern as dependence on the Strait is just 6%.
Due to the difficulty to store LNG, the reserve level of LNG in Japan is about three weeks. This may appear alarming, especially compared to the high level of reserves for crude oil. But fortunately, Japan’s dependence on LNG coming through the Strait is just 6%. Japan is importing LNG largely from outside of Middle East such as from Australia, Malaysia and the US. The low dependence is part good luck but also the result of diversification policies that have been pursued by the Japanese Government and companies over the years to enhance its energy security. The Japanese city gas companies have zero dependence on LNG via the Strait. The Japanese power companies do buy a modest amount of LNG that comes through the Strait, but they have several means to mitigate the problem. They have been asking their long-term contract partners to produce and export additional LNG. They have secured some supply through the spot market. They can reduce their LNG consumption by utilizing their coal-fired power plants more. The recent success in restarting the nuclear reactor KK6 of Tokyo Electric Power Company can save LNG consumption by 1.1 million tons per annum. LNG supply fortunately is not a serious issue for Japan. Hence, there are no concerns about the stability of power supply or city gas supply.
3. LPG is not an issue either as the Middle East dependence is even lower.
Japan currently imports its vast majority of LPG from North America. Japan’s dependence on Middle East LPG was just 3.7% in FY 2024. In addition, Japan has a 50-day national reserve of LPG, another pillar of its policies to enhance energy security. While some countries, such as India, are facing serious problems with the suspension of LPG supply from the Middle East, LPG is fortunately not an issue for Japan.
4. Domestic refining capacity ensures stable supply of fuels.
Japan has long held the policy to maintain its domestic refining capacity to ensure stable supply of fuels. The policy was one of the major pillars to enhance energy security in Japan. Thanks to this policy, Japan has the capability to supply gasoline, diesel duel, jet fuel, kerosene, and fuel oil basically from its domestic refineries. Compared with some other countries, including our Asian neighbors, which are facing the shortage of gasoline and diesel fuel, Japan is not encountering the shortage of fuels on a nationwide basis. There are reports of occasional shortage of diesel fuel or fuel oil for some customers to be sure. They are not caused by the macro-level shortage but rather by occasional gaps in the distribution. The Japanese Government has set up a mechanism to respond to specific complaints to ensure the smooth flow of fuels through the distribution channels.
5. Naphtha with 40% dependence & its downstream chemical products remain the concern.
While most fuels can be refined domestically, Japan imports 60% of its naphtha, of which 40% depends on the Middle East. Japan has maintained sufficient refining capacity to supply fuels especially gasoline which has been the most profitable fuel, but not necessarily for naphtha. Japan produces 40% of its naphtha as byproducts of refining crude oil to produce gasoline and other oil products. But for the remaining balance, the industry has considered the use of imported naphtha to make more commercial sense. The 40% dependence on naphtha from the Middle East is relatively the most serious vulnerability of Japan in the coming months. PM Takaichi has explained to the public that Japan has two months’ worth of naphtha reserve and another two months’ worth of inventories of intermediate products in the supply chains. The Government is also strengthening its efforts, together with the industry, to expand procurement of naphtha from non-Middle East countries. Many chemical products are produced from naphtha. To ensure stable production of medical supplies, the Japanese Government has already set up a Ministerial level task force to prioritize the supply of naphtha for production of medical supplies. Reports have surfaced that there appear to be concerns about the supply of thinners, one of the naptha-based products, which are essential for paints. Thinners are produced by mixing various chemical products derived from naphtha which may have led to the anxieties. The Government has quickly responded by establishing a task force to ensure a sufficient supply of thinners.
6. Effective communication to users is key to avoid panicking.
Thanks to the energy security policy measures, the supply of fuels and chemical products will be generally secured for several months. The situation may deteriorate if there should be panic among users. The rush to procure various products based on fear of possible shortage can lead to actual shortage of supplies vis-à-vis the surging demand for products. In 1973, during the First Oil Shock, rumors spread in Japan that toilet paper may be in short supply. The panic triggered by the rumors led to panic buying of toilet paper in Japan. The toilet paper just vanished from the shelves of retailers. In retrospect, there was sufficient toilet paper to meet normal demand. But panic buying led to the shortage of toilet paper. While toilet paper disappeared from the shelves of the stores, many consumers accumulated rolls of toilet paper at their home which eventually required months to be consumed. The Japanese Government is well aware of this infamous incident. To avoid such panic buying this time, the Government is on alert to respond to any possible sign of shortage of fuels and products. The Government is also taking pains to send messages to the public that there are no serious concern about the supply of fuels and products. PM Takaichi is leading this communication strategy to reassure consumers and companies. Effective communication will remain crucial to avoid panicking until the situation stabilizes.
7. Impact of price increase unavoidable.
As explained, the supply of crude oil, LNG, LPG and most fuels can be generally secured. But we cannot escape the impact of the price increase of oil and gas. Japan can be particularly hit more seriously than others as it depends heavily on imported energy. The energy self-sufficiency ratio of Japan is just 15%, the lowest among the major countries. Fortunately, Japan’s energy security policy may still help mitigate some of its impacts. The long-term contract ratio of Japan’s LNG procurement is more than 80%. The price of LNG under long-term contracts should rise as the crude oil price rises since most of the long-term contracts are linked to crude oil prices. But this high long-term contract ratio can help Japan avoid the impact of the soaring LNG spot market which is rising much more than the crude oil market. Japan’s power mix is comprised of coal fired power plants, nuclear power and renewable power in addition to gas-fired power plants, which generate about a third of the power. The use of oil in power generation is very low. This diversity in the power generation can also help mitigate the price increase of oil and gas. Unfortunately, there are limits to such mitigation. The price of various energy products is bound to increase as the global oil prices remain high. The high cost of gasoline and diesel fuel will hit the everyday life of consumers and truck drivers. This is the reason PM Takaichi has decided to resume the subsidies for gasoline and other fuels. While the payments by drivers are suppressed due to the subsidies, the burden on the government budget is growing. Price increase will spread to non-energy products and services as well. Inflationary pressure will be mounting. Consumers will be forced to spend less. Companies will slow down their investment. Negative impacts on the macro economy are unavoidable. Stock markets, bond markets, and currency markets will also be affected.
8. Japan’s energy security policies have proven their significance. But there are limits to how long the current stability can last.
Energy security has always been the key consideration of Japan’s energy policy. Multiple measures, including the high reserves of crude oil, national reserve system of LPG, the diversification of LNG sources, high percentage of long-term LNG contracts, balanced mix of power generation, maintenance of domestic refining capacity, have played key roles in keeping the impacts from the Iran conflict relatively controlled for Japan so far. But many of such measures cannot continue to be effective for too long. Eventually, the shortage of naphtha could lead to shortage of a wide range of chemical products. Panic buying may happen. The current high level of reserve of crude oil will eventually be depleted at some point next year if the closure of the Strait continues. This is why the timely resumption of the passage through the Strait is extremely important. Complete cease fire will be the precondition for smooth shipping. Although the US and Iran failed to reach a peace deal on April 12, I sincerely hope for a resolution to be reached soon through the negotiations among the parties. After the resolution of the conflict, we should not forget the vulnerabilities of our energy system that have been painfully exposed. While Japan’s energy security policy has been helpful, we cannot deny the weaknesses that have been found. I intend to discuss the issues to be addressed to enhance Japan’s energy security in a future Chairman’s Message.
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