Japan's energy dependency

A key quote from the Bloomberg article that Edward referenced in the previous post is the statement that "rising food and energy prices are eating into the cost of living." While the USA's dependence on foreign oil is frequently discussed in mainstream media, it is important to remember that Japan is even more dependent on foreign supplies of essentially all fuels; whether it be oil, natural gas, or uranium for the country's nuclear power plants.

The country's export manufacturers can to some degree pass on higher energy costs to buyers, particularly since the yen remains weak and energy makes up a relatively low fraction of the final cost of most manufactured exports. The consumer in Japan, on the other hand, has little alternative. Many, many homes in Japan still rely on kerosene fuel for heating, and are poorly insulated, with the potential for conversion to another source of heating such as electrical systems being minimal. So the fuel bill will reduce the consumer's cash available for discretionary spending.

Also, the Japanese agricultural sector is heavily subsidized, and inefficient compared to other countries. A drive through rural parts of Japan will reveal many small plots of rice fields. The retail price of a bag of rice at Japanese supermarkets is far above that of the same quantity in the US, and likely the same in relation to other countries. A policy that could be implemented in short order that would benefit Japanese consumers immensely would be to eliminate import restrictions on foreign agricultural products, particularly rice. Food prices in Japan would quickly drop radically, freeing up disposable cash.

This policy option is unlikely to be implemented, as the balance of power in the Japanese legislature lies with agricultural and rural interests who would obviously suffer as the result of such a policy. Although Japan's population obviously is highly urbanized; due to the way that their political systems are set up, seats in the legislature have not been reapportioned to reflect demographic changes. I highly recommend Karel van Wolferen's "The Enigma of Japanese Power" for an explanation of Japan's political system. While somewhat dated at this point, the book gives the reader a lot of insight into how the country's political system works.

In particular, the book illustrates how Japan's economic policy has been to subsidize export industries at the expense of the domestic consumer. The continuing weakness of Japan's domestic consumption is a case, so to speak, of the chickens coming home to roost. The country's policy makers at this point have little ability to shift this policy, as reduced exports would negatively effect GDP more quickly than the benefit to domestic consumption would appear, particularly given the prospects for a rapidly shrinking population.