"Set Gasoline at 1,600 Won per Liter No Matter What"... Japan Pours Subsidies into Refineries [What's Up in Japan]

Japan is also reeling after U.S. President Donald Trump’s national address. The Tokyo stock market, which had started off smoothly in the morning on hopes of an end to the conflict, plunged sharply, and the exchange rate was also affected. The biggest issue, however, is the price of oil. Based on the contents of the speech, there is a high likelihood that oil supply disruptions will occur over the next two to three weeks. The war has caused oil prices to soar, just as the Takaichi administration was introducing various policies to curb rising prices.

There are frequent comparisons as to why gasoline prices remain more stable in Japan compared to Korea. The main reason is that the Japanese government covers the increase in oil prices through subsidies. The Japanese government is committed to capping gasoline prices at 170 yen (1,605 won) per liter by providing subsidies to each refinery. Even if the cost of gasoline exceeds 200 yen (1,889 won) per liter due to heightened tensions in the Middle East, refineries are required to sell it to consumers at 170 yen, with the government making up the losses through subsidies. This policy covers not only gasoline but also diesel, fuel oil, kerosene, and aviation fuel.

To fund this, 280 billion yen (264.45 billion won) from the existing budget was supplemented with an additional 800 billion yen (755.57 billion won) from last year’s reserve funds. This measure aims both to prepare for a prolonged crisis and to alleviate market concerns about the early depletion of the budget.

On the 12th of last month, cars were entering a gas station in Shinagawa Ward, Japan, to refuel. That day marked the implementation of a gasoline price increase, with gasoline reaching 183 yen per liter. Photo by Jeon Jin-young.

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The issue is how long these subsidies can be sustained. Takahide Kiuchi, Chief Economist at Nomura Research Institute (NRI), published his forecast in the weekly business magazine Diamond. He projects that if oil prices remain at current levels and the subsidy continues at this pace, the related budget will be depleted by July. On the other hand, if oil prices continue to rise, the budget could be exhausted as early as June. While it is possible to respond by expanding the budget, there are concerns that this could worsen public finances and weaken the yen, which would in turn drive up the cost of oil imports.

Unlike the period when gasoline prices exceeded 200 yen per liter, Japan’s gasoline prices have now fallen for two consecutive weeks, maintaining around 170 yen per liter. However, the subsidy amount paid by the government has reached an all-time high of 49.8 yen (470 won) per liter.

On the 19th of last month (local time), Sanae Takaichi, Japanese Prime Minister, attended a dinner hosted by U.S. President Donald Trump in Washington D.C., United States, where she greeted attendees. Prime Minister's Official Residence of Japan.

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Amid these circumstances, the Japanese government is facing increasing diplomatic pressure. With ongoing tensions with China, Japan has no choice but to maintain close cooperation with the United States. In fact, Japan has announced a massive $500 billion (753 trillion won) investment plan in the United States as part of efforts to strengthen bilateral relations.

For this reason, the Japanese government has not taken a clear stance on the U.S. attack on Iran. Following President Trump’s address, Chief Cabinet Secretary Minoru Kihara avoided giving a direct answer to related questions, saying, “It’s difficult to respond to each and every one.” As a result, some experts have begun to criticize Japan’s overly cautious approach.

Meanwhile, concerns have also arisen about disruptions in the supply of petrochemical feedstocks such as naphtha due to rising oil prices, prompting the Japanese government to seek diversification of supply chains and implement various countermeasures. If international instability persists for an extended period, it appears inevitable that the overall Japanese economy will be affected.

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