JAPAN'S SHORT-TERM ENERGY OPTIONS LIMITED, FOCUS

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 002292 SIPDIS E.O. 12958: DECL: 08/20/2013 TAGS: ENRG EPET ECON PGOV JA SUBJECT: JAPAN'S SHORT-TERM ENERGY OPTIONS LIMITED, FOCUS ON INCREASING EFFICIENCY REF: TOKYO 2174 Classified By: Ambassador J. Thomas Schieffer for reasons 1.4 b,d ¶1. (C) SUMMARY: Despite political pledges to relieve energy price pressure on Japan's small and medium enterprises, fiscal constraints and oil supply limitations leave the GOJ with few near-term policy options. GOJ energy-related economic stimulus measures will focus on targeted incentives to boost energy efficiency in the medium to long term, according to GOJ officials and energy economists. Japanese officials argue, unconvincingly, that intervention to curb speculation in commodities could also ease prices. END SUMMARY. ¶2. (C) The outline of the GOJ's Emergency Economic Stimulus Package released August 11 seeks to promote energy conservation and assist small and medium enterprises to adjust to higher prices for raw materials, including fuel. While details of the plan have yet to be worked out in the Government and would still need to go through the Diet, Japan has few options to affect directly fuel prices in the near term, according to senior Ministry of Economy, Trade and Industry (METI) Agency for Natural Resources and Energy (ANRE) International Affairs Division officials. These officials report METI Minister Nikai has very serious concerns about the impact of the high price of oil on Japanese companies, especially small and medium enterprises. After becoming METI Minister in early August, Nikai in his first press conference called for a forum of oil producing and consuming countries to deal with the high price of oil. ANRE officials later explained Nikai was referring to two meetings that are already planned, a G8 International Energy Forum set for November and a meeting of producing and consuming countries in December in London. The London meeting is a follow-up to a similar meeting in Jeddah last June. ¶3. (C) Beyond such meetings, however, officials argue the GOJ can do little on the supply-side in the near term to reduce fuel prices. A release of petroleum from Japan's strategic reserve is not realistic for Japan because the reserve is designed to counter acute cuts in supply. Instead, the focus needs to be on incentives to improve energy efficiency and reduce demand in the longer term, officials report. ¶4. (SBU) While public pressure for relief from higher energy prices will continue to be a political issue, recent movements in the crude oil market favor a gradual reduction in prices, according to Institute for Energy Economics Japan Senior Managing Director, Dr. Tsutomu Toichi. Toichi cited three trends that favor a gradual fall in oil prices. First, demand for oil, particularly gasoline, has already started to drop. (Note: as one indicator of falling consumer demand, an ANRE survey showed gasoline prices hit 185.1 yen per liter on August 4 and that gasoline sales in July were down 8.9% year-on-year. End Note.) Secondly, Saudi Arabia's announcement in June that it will increase crude oil production is helping tamp down prices. ¶5. (SBU) Finally, Toichi noted signs speculative activity in commodity markets is decreasing with major institutional investors shifting activity away from the crude oil futures markets. (Note: METI's FY2007 White Paper on Trade linked speculation, primarily among institutional investors, to increases in the price of crude above the fundamental demand price. Toichi's organization, which receives about half of its operating revenue from METI commissions, performed the analysis for METI's White Paper. However, CFTC market monitoring shows net positions of short-term investors have not grown relative to the overall market over the past two years, precisely the time at which they are being accused of causing the price of oil to soar. End Note.) ¶6. (SBU) Toichi also said the GOJ will face continuing pressure to ease commodity prices from politically active small and medium industries, such as the fishing industry (reftel),that are unable to pass easily price increases to consumers. Toichi discounted the likelihood of supply-side intervention through releases from Japan's strategic petroleum stockpile, saying that even were the GOJ to release reserves, OPEC would act to counter any significant price reduction by limiting production. Rather, Toichi predicted TOKYO 00002292 002 OF 002 the GOJ will look to fund development and use of alternative energy technologies, such as solar power for domestic consumer use, to promote a reduction in energy demand as a long-term sustainable policy option. SCHIEFFER