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 AOYAMA VIEW

REFORM WORK STARTS – ENERGY, FARMING AND FOOD ON WISH LIST
The hostage crisis ended sad as expected. It seems likely that the terrorists never planned to release their long held prisoners, just used them with precision timing for maximum impact to create fear and panic among the Japanese. From some reactions, it is evident they succeeded, while others indicate that people are now more determined that Japan should act globally and proactively, not try to hide. It is now clear that Japanese can be terror targets even when the country does not participate in any military action with other nations.

Obviously there's much to do to upgrade Japan's preparedness as, despite all talk, the Abe government was caught just as unprepared as those before it. No advance plans had been made for the eventuality that terrorists would suddenly escalate their earlier ransom requests when PM was visiting the area and, once this happened, Japan clearly had few political channels for negotiations nor military tools or trained troops for a rescue mission. In fact, it was found that the Constitution would not even allow to engage SDF to help citizens as Japan mainland was not attacked by another country.

Once again, world's No.3 economy was left to either ask help from USA and other allies with sufficient military means or from small Jordan to release a convicted murderer from its jail. The latter avenue was pursued, but came quickly to dead-end as the terrorists had already killed the Jordanian pilot also involved in the case. That his killing, even more brutally than the two Japanese, had taken place already a month before the terrorists presented their demands was another proof that terrorists were keen only on atrocities for shock value and never really interested in money. They seem to earn steadily the latter from kidnapping locals and black market oil sales, grimly with Western allies Turkey and Jordan itself acting as main buyers to smuggle it further to the world markets. Cutting off this money line would be more effective way to suppress the IS than expensive bombings. It would also be non-military so that Japan, the second biggest oil buyer in the world, could play a big role there. Let's see if the forthcoming G-20 meeting brings any progress in this front.

In Parliament, the political talk fest around the crisis should come to end as there are plenty of important issues delayed from last year to tackle. Government has a list of over 70 new laws it wants to pass through before the session ends in April, mainly to promote economy and reforms with the ordinary budget for FY2015 as the main frame. Despite all babble, the extra budget for the last 2 months of FY2014 already sailed through both houses, but wonder how much of its planned JPY 3 trillion spending will reach its targets during the 7-8 weeks left of the financial year. Anyway, the figure serves as good reference for two other items coming up below.

The reform issues are much tougher to tackle than spending money as they go against powerful vested interests in bedded in LDP itself. The energy sector is a good example how confusion prevails over the best made plans. In fact, it looks like a complete mess.
To cover the hole left by all nuclear plants "under maintenance" Japan is paying every year as much as the new JPY 3 trillion supplementary budget for additional fossil fuel imports, so starting up the idle plants, after passing the new safety tests, is a financial priority. Yet, despite green light from the national safety authority, the first NPP restart in far away Kagoshima has been put off time and time again for more checks on volcanic activity and for more detailed evacuation plans required from the councils. Further complications are piling up in the local permit system in Fukui Prefecture, who has been willing to host almost one fourth of Japan's remaining 49 NPP's and has positive stand to get them restarted, but now has the neighboring prefectures demanding to have a say, too.

Same time, it comes out that the NPP restarts are not likely to bring back the lower electricity prices as the risk insurance fees are up and, it turns out now, the regional monopolies "forgot" to include in their electricity prices the costs for the closure at the end of their life time. The reactors' life time limit has been now set at 40 years and one in every five NPP's is already so close to it that they are unlikely to start again for purely commercial reasons. It is an unpleasant surprise to tax payers to learn now that they have to pay extra for the closing costs after paying the world's highest electricity bills for decades.

Meanwhile, the alternative energies, especially solar power parks spurred by the world's highest feed-in tariffs, have been coming up so rapidly that the weak old grid cannot handle their expected production. Or so the monopolies, who own those grids, say. As reported earlier, private investment into solar power has been so massive that METI license office has had hard time to handle all the applications. At end last year, calculations showed that if all the solar power plants licensed so far will really come on stream, their total output would make 14% of total national energy supply. It's quite a jump from 0,1% or so just two years ago. In reaction, some regional utilities refused to buy all solar on offer claiming their grids could collapse with such big volumes of rapidly varying power. METI whistled time off and, after some contemplation, came out with ruling that, after all, the utilities would not be obliged to take on all the solar power offered to them, but 50% would be enough. This, of course, brought in howls and screams from the investors who had put their money in leasing land and building facilities based on the government promises.

If only the officials had listened to experts, who said from the beginning that building a better grid and separating it from the regional monopolies was as essential requirement in the market liberalization process as loosening regulations to allow for entrance of independent producers. The resulting mess reminds of an old story that when Sweden changed its roads from left-side traffic to right-side traffic in the 60's, it decided to make it less stressful by having cars change first and trucks only the following week. Of course, this was not true, but just a vicious joke in Finland about our too considerate neighbors. Yet, to describe Japan's energy policy change, the joke applies in full, even adds that each prefecture, town and village seem enabled to choose their own time for the change – or not accepting any change at all.

One of Japan's leading energy experts, Nobuo Tanaka, former Executive Director of the International Energy Association (IEA), who today leads local Institute of Energy Economics (IEEJ), says solving the energy issue and reforming the market structure is so important for Japan that you could call it Abenomics' "fourth arrow", separate from the third arrow with all other reforms. In a moment of honesty unfamiliar for a government bureaucrat, Tanaka admitted in a private presentation that, after METI lost the turf fight about the solar power, it is now highly unlikely that the government plans to dismantle the powerful monopolies and unbundle distribution from production will be realized. The monopolies' money to and backing from local politicians proved more powerful than all experts, PM and METI put together.

The only utility under government control is the practically bankrupted TEPCO, who is now reforming its activities into three different companies, one for power production, one for consumer distribution and one for dismantling the wrecked Fukushima No.1. Once government sells its 50% ownership to new owners, the grid unit could become the fancied independent distribution company for Tokyo area. Fate of the production unit is in the hands of Niigata prefectural government, who is strongly against starting up its 6 reactor mega plant there as long as it is owned by the "criminal" TEPCO. In contrast, the life of the dismantling unit seem to have a long future guaranteed as the closing work in Fukushima will take decades – and trillions of tax payer money.

There is no concrete plan to rebuild the grid even technically or to overcome the country's historic division into two different technical standards nor likely to ever be as the regional producers have now gained the upper hand. In contrast, reading that Finland, who has a good, independent nationwide grid, has decided to invest into further upgrading its technical level. The project will take 15 years and cost EUR 7 billion -less than JPY 1 trillion or one third what Tokyo now will try burn in two months - and it will include burying all the cables underground, even in deep forests, for safety. In comparison, Japan is about same size geographically with much more money and electricity prices easily 3 times higher, but the power monopolies say they cannot bury their ugly wires even in urban areas blaming high costs – and safety! As they say, there are many types of calculators and many kind of views.

The amazing decrease in global oil prices, if transferred also to LNG, will help Japan to pay its energy import bill for the time being, but there's no guarantee the prices will stay low in long term. As Tanaka-san put it, the future oil price depends on just two, rather unpredictable men, namely the new King of Saudi-Arabia and the long time Czar of Russia, Mr. Putin. In fact, the latter one's target is absolutely clear: he wants the prices up as quickly as possible to save the Russian economy. Global trouble and concern is a traditional reason for oil price rise, so this is one reason why Putin feels free to behave so recklessly and aggressively against Ukraine and other neighboring countries. The more confusion and concern, the quicker oil prices go back up, must be his thinking.

The reform prospects don't seem much easier for Japan government in the agriculture sector. The opposition there is another powerful monopoly, the farmers' organization JA, who buys all the farm production and sells it further to wholesalers and retailers around the country as well as provides feed, fuel, machines, finance and expert advice to farmers. It might have "only" one million members, but it employs probably as many bureaucrats, its Tokyo head office looks as mighty as any major corporation and driving around countryside you cannot help noticing its big warehouses, office buildings and meeting halls, so it's only natural that such big bureaucracy would fight for its privileged position against any interference. Through its members JA controls big part of the vote in country side, the traditional support base for LDP thanks to the twisted vote count, so many ruling party MP's must be thankful for JA for their jobs.

Japan's farming problem is the regulatory landscape the JA system maintains: special legal position for farm land, much too small farms, old methods, inefficiency and high costs. These all lead to extraordinary food prices and need the world's highest import duties and strictest quotas to survive. Government reform list consists of deregulating purchase of agricultural land to make for bigger farms, allowing companies to engage in large scale farming with modern methods and change of public support policy from import protection to farm support. It also plans to make JA more financially accountable for its big business operation by demanding it will change its legal position from association to a listed company subject to corporate accounting laws.

This is all line what Finland went through when it joined EU 20 years ago and many of us remember it was not easy even there. Like Finland then, Japan tries to combine the change to joining a free trade agreement - here it is TPP - that will open up imports and oblige a schedule to cut back tariffs. Talks on that have dragged on without progress for long time, but, suitably, recent changes in political scene in both sides of the Pacific seem to have brought the two countries now closer to a compromise solution. Japan's own internal twist between JA and government targets also probably was solved one way or another in internal talks within LDP last month. It is easy to guess that government's final proposals to the parliament in next few weeks will be based on these compromises.

For one, I hope the changes will be significant and more open competition will follow. On top of practical ban on key basic products and high tariffs on all others, the closed farm system has produced several scares of availability over the years. The recent butter shortage is but one example of what happens when farmers close down their farms and relief imports are not allowed in. In this case the reason was the unprofitability of milk production, but in near future, it will be increasingly the full scale retirement of farmers. Their average age is well over 60 years and there are few young people who wish to start up the hard work with such small farms and old systems.

Finland's example shows you can have more competition, yet healthy, modern farms with happy young farmers and high class products.

Timo Varhama  
February 5, 2015  


Previous Columns

26 January 2015
Terror strikes, plenty work, sad memories wait

15 January 2015
Watching AKB, Eating Mochi, Spending JPY 96 Trillion - Japan Off to Better 2015 After So-So 2014

18 December 2014
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12 November 2014
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28 October 2014
Money Scandals with Ministers, Economy and Reforms Bogged Down - Abenomics is Facing Demise, Internal Political Commotion Gains Again.

14 October 2014
Water as Fuel, LED Lamps and Nobels - Japan Tech Still at the Top of the World

25 September 2014
Scotland Challenges Britain - Finland Tries to Live with Russia

11 September 2014
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2 September 2014
Bad News and Panic in the Park, Putin Planes over Moomin Island?

20 August 2014
Hot Summer, Heavy Rains, World on Fire, Economy Sputtering PM Looks Tired

25 July 2014
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23 June 2014
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3 June 2014
Nationalism - Good for Economy, Soccer - Dangerous in Foreign Politics

21 May 2014
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12 May 2014
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30 April 2014
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3 April 2014
Colorful stories and scandals, serious tax challenge to consumers

20 March 2014
Putinisms, Abeisms, Obama, XI – Global Challenges Hit All At Home

21 February 2014
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10 February 2014
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23 January 2014
Three Wise Men VS. One PM, Two Ex and a Colorful Crowd
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16 January 2014
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About the Columnist

The columnist is a Japan veteran among Finnish business, our Chamber ex-president and today Member of the Board of Trustees.
After running a major Finnish industry company's Japan business for over 20 years, he is now Senior Associate in a strategic consulting company.

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