Japan's Power Market News 2023/W17

Energy Infrastructure and Japan's Export Strategy?

Worldwide movement towards #hydrogen as a major #fuel source appears to be picking up momentum in recent months, with the European Commission announcing a hydrogen strategy, and a consortium of European gas transmission operators releasing a “European Hydrogen Backbone” document outlining a plan for hydrogen delivery infrastructure across the continent. Questions of overblown targets and greenwashing by #fossil fuel companies aside, it’s clear that hydrogen is likely to be a growing market in much of the world for the next several decades.

It’s against this backdrop that we’re going to take a fresh look at Japan’s hydrogen development activities, where one will discover that there’s both less and more than meets the eye.

In December 2017, Japan’s “Basic Hydrogen Strategy” was approved by the Cabinet, with the stated aims of reducing Japan’s dependence on imported primary #energy sources and helping bring #carbon emissions about 25% below FY 2005 levels by FY 2030.

In this context, Japan has indeed engaged in some interesting demonstration projects. However, all of this simply can’t be taken at face value.?

If the government is serious about hydrogen as a mechanism to reduce Japan’s dependence on fuel imports, one would expect to be hearing more about the development of domestic hydrogen production capability at scale than about overseas production demonstration projects. Setting aside supply risk and strictly considering carbon emissions reduction targets, Japan doesn’t yet appear to be moving aggressively to secure hydrogen produced in a green way from overseas sources.

So, what’s really going on here?

An important piece of the answer lies in Japan’s overall economic struggles of the last several decades, and the centrality of exports to Japan’s #economic strategy.

Population Decline and Economic Insecurity

After 42 years as the world’s second biggest economy after the United States, Japan was overtaken by fast- growing China in 2010. Japan's share of global GDP increased from 9.8% in 1980 to 17.6% in 1995, and then decreased to 8.5% in 2010 and 5.7% in 2018.?

As Japan was being surpassed externally, it was also contracting internally. The country’s population peaked in the late 2000s at around 128 million people and has been slowly declining since then. In 2019, there were just over 126 million people in the country.

People aged between 15 and 64 made up 59.5% of the total, while those aged 65 and above made up 28.4%. By 2060, the Cabinet Office expects the share of people 65 years and older to increase to 39.9% and the share of those between 20 and 64 years old to decrease to 47.3%.

A great deal of Japan’s economic growth in the second half of the twentieth century was driven by exports, but after peaking in the late 2000s, exports took a dive from which they haven’t fully recovered.

Readers will be familiar with Japan’s strength in automobile exports. It remains second only to Germany (a position which could be threatened if Japan maintains its focus on internal combustion engines and hybrids at the expense of EVs). Japan’s dominance in semiconductors has taken more of a hit over the last few decades, particularly as Taiwanese and Korean companies have gained market share. Especially dramatic, however, has been Japan’s loss of its former commanding position in the worldwide market for #solar panels.

In the early 2000s, four of the top five solar panel manufacturers in the world were Japanese - Sharp, Kyocera, Panasonic, and Mitsubishi Electric. In 2005, Japan held 47% of the global market. By 2018, China had shot past and reached 54% of market share and knocked Japan all the way down to a dismal 3%.

Energy Infrastructure as an Export Centerpiece

Solar panels are far from the only arena in which Japan has gone after international #energy infrastructure markets. In 2005, Japan’s Cabinet launched an initiative to spur Japanese companies on to become major players in the worldwide #nuclear power market, which showed signs of a possible rebirth at the time.

Toshiba, Hitachi and Mitsubishi all pursued the market for new worldwide nuclear power plant construction through a variety of acquisitions and international partnerships. In many places they struggled to compete with French, Korean and Russian players, all of which are state owned and could therefore offer subsidized pricing and financing arrangements beyond what the Japanese companies could muster. Ultimately, the 2008 financial meltdown placed enormous drag on the international market for new plant construction, and the 2011 Fukushima Daiichi accident sounded the death knell for most of the prospective projects.

Japanese heavy industry companies remain strong in the global market for coal and natural #gas plants, but #coal plants are quickly coming to be viewed as little more than a stranded asset risk in much of the world, and natural gas is increasingly coming into the crosshairs of worldwide decarbonization initiatives as well.

It’s in this context that Japan is working to position itself as a major player in the global hydrogen market which may bloom in the coming decades.

Early Bird

It’s often said that Japan is “racing to be second”; that Japan prefers to let someone else take the risks involved in being a first mover, and then to follow close on their heels and ultimately be the one to perfect the innovation. There is an exception to this pattern though: Japan has shown itself willing to move first when it is convinced that taking a “wait and see” approach likely entails greater risk.

A sense that inaction could be the riskier approach may be an important factor behind Japan’s aggressive development of equipment - most notably the world’s first dedicated #hydrogen tanker, and power plants which can run on flexible mixes of hydrogen and natural gas - for an international hydrogen supply chain which presently exists mostly in theory. That sense of risk is informed by Japan’s bitter past experience with a closely related market - that for #LNG tankers.

Japan arrived late to the worldwide market for the manufacturing of LNG tankers, not capturing substantial market share until the mid-1980s. Although it overtook the US by 1995 and caught up with Europe by the early 2000s, South Korea soon came up from the rear and overtook Japan.

By 2019, not only had Korea captured 55% of the world market for LNG tankers - to Japan’s 27% - but even a third of LNG tankers operated by Japanese companies had been built in South Korea. To have successfully dislodged the European shipbuilders which had been dominant since the 1960s and then quickly been overtaken by upstart South Korea was undoubtedly a bitter pill for Japan, which it hopes not to have to swallow again in the nascent hydrogen market.

Energy’s Place in Rebounding Exports

Japanese exports have been on an upward trend for the last decade, from a bit over 10 trillion JPY in 2010 to nearly 25 trillion JPY in 2018. Energy-related products accounted for over 20% of the total in 2018, second only to communications-related products.

Japan’s investment in flagship hydrogen demonstration projects is much easier to understand when one sets aside the putative connection with Japan’s energy import and carbon emissions reduction targets and views it in the context of Japan’s overall economic struggles and its focus on strategic positioning to capture new export opportunities in the coming decades.

Energy as it fits into Japan’s export strategy is a topic we’ll return to in the future.

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