New findings on fossil fuels and inflation in Japan

New Cambridge Econometrics analysis for the European Climate Foundation, explores the role of energy prices in recent consumer price inflation in Japan, with a view to understanding the potential for faster energy transition measures to ease inflationary pressures and risks. 

Cambridge Econometrics analysed energy system and inflation data from a variety of sources to understand the role of energy prices in Japanese consumer price inflation. The report also takes stock of Japan’s wider energy transition strategy, the Japanese government’s response to the recent energy price increases, and discusses how the future energy system can better protect consumers from sudden price hikes. 

3 key findings:

1. Fossil fuels are key drivers of recent consumer price inflation in Japan

  • 16 – 24% of Japan’s annual rate of inflation, in the summer of 2022, was driven by fossil fuels.   
  • 25% of Japan’s overall inflation rate was driven by electricity prices.  
  • Retail prices of key fossil fuels increased by 20% within 12 months, while the overall inflation rate is currently around 3%. 

2. The increases in household energy prices make low-income households in Japan 40,000 yen worse off in 2022 compared to 2021, mostly due to higher electricity prices

  • We estimate that Japan’s poorest households will spend roughly 18% more on energy in 2022 than in 2021. 
  • The Japanese government is using industry subsidies to keep fuel prices low, and has recently announced to lower household gas and electricity bills and extend existing fossil fuel subsidies. The latest package is estimated to be worth 25 trillion yen, equivalent to 4% of Japan’s GDP. 

3. Japan is highly dependent on fossil fuel imports and exposed to global price volatility. Renewables are highly price competitive; boosting capacity would reduce Japan’s energy import dependency

  • IRENA figures show that onshore windfarms and new utility-scale solar PV are highly price competitive and around half the cost of gas-fired plants per MWh of power produced.  
  • Further expansion of renewables and accelerated electrification of transport and heating would reduce Japan’s dependency on energy imports and decrease households’ exposure to global market prices.  
Carl Heinemann Managing Economist [email protected]