Japan Vs. China: Oil and a Tale of Two Countries

How the oil price drop has very different effects on China and Japan.

November 25, 2014

Traders in world energy markets have been reporting over the last two months that “big hands” have been in the oil market on an almost daily basis, pushing the price down.

U.S. consumers and the U.S. economy as a whole are benefiting from this price decline handsomely.

So is China. The oil price crash has been immensely favorable for China, the world’s largest energy importer.

The drop in prices is allowing the Chinese government to expand its strategic oil reserve on the cheap – but not just that. China’s leaders are putting the money saved from the oil bill to use as they advance the country’s interests elsewhere.

The 30% drop in energy prices means that China will save $130 billion on its energy bill over the next 12 months, assuming that oil prices average $85 per barrel.

Notably, that is more than the total amount China has committed to the capital of the New Development Bank (NDB) – which some call the BRICS bank – the Asia Infrastructure Investment Bank (AIIB) as well as the $40 billion Silk Road Fund.

China benefits, Japan doesn’t

Japan could be in a similar advantageous position as China is, were it not for the aggressive currency devaluation strategy adopted by the Abe government and imposed on the Bank of Japan.

That devaluation strategy – meant to stimulate the country’s export sector – has driven up the yen cost of energy for Japan, even as the price of energy is falling globally.

Look at the numbers: The yen has fallen about 55% against the U.S. dollar since 2012. Meanwhile, oil prices are down about 30%. Thus, Japan is paying approximately 25% more for energy today than it was when the crude oil price was 35% higher (at $115 per barrel, compared to today’s $79 a barrel). Go figure!

Meanwhile, not only is the fall of energy prices a massive boon to China’s government and overall economy. It is great for Chinese households, too. They continue to see substantial increases in real household income. That, in turn, is driving sustained consumer spending across the economy. As a cherry on the cake, the renminbi just hit a new record high in currency markets.

Dreaming of China

How different the current situation presents itself to Japanese households. Rising import costs, as a direct consequence of Abe’s devaluation strategy, have been a key factor in seeing Japanese households’ real income plummeting by 6% according the latest data.

And the morale of the tale? We live in one world where economies that are net importers of energy should benefit enormously from the recent drop in energy prices. For the world economy, it is the equivalent of a trillion dollar tax cut.

Yet, one country, Japan, continues to dig itself deeper into a hole. As a consequence of its toxic policy mix of surging debt, devaluation and no serious structural reform, the Abe government has managed to turn a veritable boon into a substantial disadvantage for the country.

No wonder the prime minister has rushed his country into a snap election. For once, the electorate fully understands how they have been fleeced yet again by their political leadership. They will come to see that Abenomics, in reality, means Abegeddon for Japan.

Takeaways

US consumers are benefiting handsomely from the oil price decline. So does China. But not Japan.

Japan’s devaluation strategy – meant to stimulate exports – has driven up the yen cost of oil imports.

Japan is paying 25% more for energy today – even though the crude oil price is considerably lower now.

For the world economy, the recent drop in energy prices is the equivalent of a trillion dollar tax cut.

Abenomics, in reality, means Abegeddon for Japan.