First it was gas prices, then it was food prices, and now it is the turn of basic utilities to see costs surge by double digits. Dow Jones reports that “Japanese utilities, forced to idle their nuclear power plants over the past two years and facing higher fuel costs due to a weak yen, are now looking to push through double-digit rate hikes for their commercial customers.” This means less disposable income, less corporate profits, less monetary velocity, less growth and ultimately less “inflation” in other things such as the much desired stock market, which was supposed to be the wealth effect offset to all staples price increases. At least on paper. Of course we explained on various occasions, most recently here, why in Japan a US-style of wealth effect price substitution would never work. Surely nobody could possibly see this coming – “The action comes at a bad time for some Japanese companies that were hoping the fall in the yen and much-trumpeted efforts by the government to turn round the economy would help improve their prospects.” Ah hope - the only strategy left.
More on the mainstream press catching up with what we said over two months ago:
While the government has raised some concerns about the raising of power rates, the move seems inevitable given the prior deregulation of electricity prices.
Eight of the nation’s nine utilities with nuclear power plants have been posting losses due to the higher cost of buying imported fossil fuels in the wake of the Fukushima nuclear disaster and the subsequent shutting down of reactors amid safety concerns.
And the biggest catalyst for what is set to be a major inflationary spike, but not in discretionary prices, but in staples – the same one every other time: cash runs out.
The utilities managed to keep prices at low levels over the past two years despite the higher fuels costs by drawing on cash reserves. But some of them are now running low on reserves, and see price hikes as the only way to avoid possible bankruptcy.
On paper, the government has no power to intervene in pricing issues between corporate customers and utilities because of the liberalization of these markets. But that price deregulation left the utilities in full control of the power grid, ultimately stymieing attempts by outside firms to grab a larger share of the market.
Would a wholesale bankruptcy of the entire Japanese energy sector be really that bad? It would simply mean the wholesale nationalization of the industry, from where Japan could simply proceed to subsidize everything. Naturally this would simply be the first step to global trade warfare as neighboring countries saw this as plain old subsidies, which they would be. But Japan will cross that bridge when it gets to it.
In the meantime, the Japanese consumers who are so happy with Abe are about to be much, much poorer:
Japan paid Y24 trillion ($ 248 billion) for imported fossil fuels including crude oil, natural gas and coal in 2012, up 10% on year, compared with Y21.8 trillion in 2011, itself a 25% increase, according to the Ministry of Finance.
Most of Japan’s corporate customers have no choice but to accept the proposed rate hikes, because of the virtual monopoly enjoyed by regional utilities despite a nominal liberalization of the sector in the mid-1990s.
Tokyo Electric Power Co. , the owner and operator of the stricken Fukushima Daiichi nuclear power plant, announced in early 2012 an average 15% rate hike, as its bill for fossil fuels swelled to Y3.26 trillion, a rise of 50% from pre-Fukushima levels. Later in November, it said that compensation for damage caused by the nuclear accident in March 2011 and the cost of decontamination work around the Fukushima area may each top Y5 trillion.
Four other major utilities, Kansai Electric Power Co. , Kyushu Electric Power Co. and Shikoku Electric Power Co. in western Japan and Tohoku Electric Power Co. in northern Japan, have all announced plans to raise rates for corporate customers by 14% to 19%.
To the government this is merely an unintended consequence which they never could have foreseen. Sadly, everyone else could.
The government has belatedly acknowledged the importance of having a neutral grid operation not tied to the interests of the utilities and in February formulated a plan to split these nine power utilities into grid operators, power generators and power retailers. Under the plan, the separation of grid operation will take place as early as 2018.
The only hope for Japan, absent some magical arrangement whereby the US can export billions in BTUs of LNG well below cost to Japan, something Abe is desperately praying for, is the restart its nuclear power plant.
Japan’s electricity prices will likely rise by 10-20% this year, unless at least a few of the 48 currently idled reactors resume operations, said Atsushi Suzuki, a senior consultant who monitors the energy industry at Mitsubishi Research Institute. The impact of electricity rate hikes on the economy is difficult to calculate because it varies among industries, Mr. Suzuki said.
“In the long term, we may give up nuclear power, but for now, there’s no alternative but to restart safe reactors,” said Yoshimitsu Kobayashi, president of Mitsubishi Chemical Holdings Corp. (4188.TO), a major electricity user.
Putting currently idled plants back on line offers an inexpensive way to generate power in the short-term since a large part of their costs have already been amortized, said Takumi Fujinami, senior researcher at the Japan Research Institute.
But given the difficult political environment over such restarts, he says that power conservation is a more realistic course of action in the long run.
In the aftermath of Fukushima we wish Abe the best of luck with this approach: it is far more likely he premiership will be cut well short on soaring energy, food and gas prices, before the locals are willing to go through another Fukushima.
Which then begs the real question: how long until Abe’s government mandate is cut short by populist anger due to out of control inflation in staples and unrest?
We give him 4-6 months.
Zero Hedge
Jerome Favre/Bloomberg
