The conflict in Iran has been unsettling for investors on many levels – not least the significant human cost and the broader geopolitical implications for the region and beyond.
From an investment perspective, much of the focus has fallen on Japan, which imports more than 90% of its oil from the Middle East. The concern is understandable. What the headlines have been slower to convey, however, is a more complete picture of Japan’s energy supply.
A substantial reserve position
Japan entered this conflict with more than eight months of oil in reserve – one of the largest strategic stockpiles of any country in the world. The government moved quickly, announcing the release of 80 million barrels – equivalent to around 45 days of domestic consumption – in mid-March, the largest drawdown since Japan’s reserve system was established in 1978.
Simultaneously, the government is working to secure supply from alternative sources. Bypass shipments of Middle Eastern crude, rerouted via Saudi and UAE pipeline infrastructure that bypasses the Strait of Hormuz entirely, are already making their way to Japan, with the first arrivals expected next month. In short, the immediate supply risk is being actively managed.
Energy dependency is more nuanced than it appears
It is also worth recognising that Japan’s economy does not run on oil alone. Oil accounts for just over a third of Japan’s total energy supply, with coal (c. 26%), liquefied natural gas (LNG – c. 21%), renewables (c. 11%) and nuclear (c. 7%) making up the remainder.
While crude oil imports are heavily concentrated in the Middle East, Japan is more diversified in its sourcing of LNG – the fuel that powers much of its electricity generation. Australia supplies around 40% of Japan’s LNG, Malaysia a further 15%, with the US and Indonesia accounting for much of the remainder. Only around 11% of Japan’s LNG originates from the Middle East. For a country routinely portrayed as acutely vulnerable to the region’s instability, this is a meaningful structural cushion.
Emergency measures are compounding the resilience
The government has acted on several additional fronts. Restrictions on coal-fired power generation have been temporarily lifted, directly reducing pressure on other energy sources, including LNG. Meanwhile, the Kashiwazaki-Kariwa Nuclear Power Plant Unit 6 – operated by Tokyo Electric Power Company – is expected to resume full commercial operations this month. At the petrol pump, emergency subsidies introduced in March are keeping the national average price of petrol at around ¥170 per litre – approximately 90p, well below typical UK forecourt prices – cushioning the immediate impact on households and businesses alike.
The concern surrounding Japan’s energy dependency is not unfounded. But the full picture – a substantial reserve buffer, a diversified supply base, bypass routes already operational and a government responding with speed and scale – suggests the risks are considerably more manageable than the media headlines have implied. We will continue to monitor developments closely, but we do not believe the current situation materially alters the investment case for Japan.
By Masaki Taketsume, portfolio manager, Schroders Japan Trust plc
