Manufacturing Powerhouses Crumble Under High Oil Prices

Germany's Trade Deficit Reaches 1 Billion Euros... Largest in 31 Years
Japan Faces Worst Energy Crisis Amid Yen Weakness and Heatwave
South Korea Also Records Largest Trade Deficit in 66 Years in First Half

[Image source=AP Yonhap News]

[Asia Economy Reporter Kim Hyunjung] Soaring energy prices caused by supply and demand instability following the Ukraine war are shaking manufacturing powerhouses such as Japan and Germany. South Korea is also recording a trade deficit larger than during the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis, indicating the growing impact of the shock.

On the 4th (local time), Bloomberg reported that Japan's energy crisis is intensifying due to the Ukraine war, heatwave, and yen depreciation. As of that day, the yen stood at 135.93 per dollar, a 21.61% decline in value compared to the previous year.

The price of Brent crude oil, a benchmark for global trade, has risen 40% this year due to Russia's invasion of Ukraine and demand recovery. When converted reflecting the yen's value, prices in Japan have increased by nearly 70%. According to local trade data, the cost of importing one ton of liquefied natural gas (LNG) in yen terms jumped 120% year-on-year in May.

Jane Nakano, senior researcher at the U.S. think tank Center for Strategic and International Studies, explained, "Several factors including high fuel prices after the war and a plunging currency are putting significant pressure on Japan's energy security," adding, "This is becoming one of the most severe energy crises Japan has faced."

Japan joined sanctions against Russia early on, significantly shrinking energy import routes such as oil and coal. The Kishida Fumio administration is particularly concerned about worsening supply conditions as the Russian government moves to create a new corporation to acquire rights and assets of the Sakhalin project, a Far East energy development initiative. The fact that most nuclear reactors have been shut down since the 2011 Fukushima nuclear accident, leaving no alternatives, further heightens concerns. The government has even urged citizens to conserve electricity amid an unusually prolonged heatwave.

[Image source=Yonhap News]

The situation is also worsening in Germany, Europe's largest economy and a manufacturing powerhouse. Due to the surge in energy prices, exports sharply declined, resulting in a trade deficit of 1 billion euros (approximately 1.35 trillion won) in May. This is the first time Germany's trade balance has been negative in 31 years, since 1991.

Meanwhile, Germany's imports from Russia in May surged 54.5% compared to last year, while exports to Russia fell 29.8%. The sharp rise in imports from energy-supplying countries including Russia is due to soaring energy prices, whereas exports declined due to Western sanctions against Russia in response to the Ukraine invasion. China's strict lockdown measures under its 'Zero COVID' policy also had a negative impact.

Oliver Rakau of Oxford Economics, a UK economic research institute, said, "Maintaining the status quo is becoming difficult in every aspect," explaining, "Recent macroeconomic data show how structurally dependent Germany is on overseas demand, raw materials, energy, and intermediate goods supply."

The shock to raw materials including energy has also hit South Korea directly. According to the Ministry of Trade, Industry and Energy's June trade trends report, South Korea's exports in the first half of this year increased 15.6% year-on-year to $350.3 billion, while imports rose 26.2% to $360.6 billion, resulting in a trade deficit of $10.3 billion. This is the largest first-half deficit since statistics began in 1956, marking the biggest deficit in 66 years. It far exceeds the deficits recorded in the first half of 1997 ($9.16 billion) during the Asian Financial Crisis and 2008 ($6.4 billion) during the Global Financial Crisis. With export growth slowing to the 5% range last month after showing 10-20% growth rates until May, concerns are growing that the deficit will widen further.

This content was produced with the assistance of AI translation services.