The Japanese government has recently decided to allocate $7 billion (1.1 trillion Japanese yen) from its emergency reserves to continue subsidies for gasoline and other fuel prices. This action is aimed at controlling retail gasoline prices amid a sharp increase in oil and fuel import costs.
Details of the subsidy program
This subsidy program, introduced in March following the outbreak of war in the Middle East, has kept the national average gasoline price at 170 yen per liter (equivalent to $1.08 per liter or about $4.10 per gallon). However, the subsidy costs for gasoline, diesel, and jet fuel amount to billions of dollars monthly for Tokyo, putting additional pressure on Japan's public finances.
Gradual reduction of subsidies
On Thursday, Sanae Takaichi, Japan's Prime Minister, announced that the government has decided to increase the gasoline price subsidy limit by 5 yen (equivalent to $0.032) per liter on a monthly basis. However, Takaichi did not mention when the subsidy program would end completely. Japan is heavily affected by developments in the Middle East due to its lack of domestic energy resources and heavy reliance on imports.
Dependence on Middle Eastern oil
Before the war began, Japan's dependence on crude oil from the Middle East, which passed through the Strait of Hormuz, accounted for over 90% of the country's total crude oil imports. About 70% of the Middle Eastern supplies typically reached Japan via tankers passing through the Strait of Hormuz.
With the closure of the Strait of Hormuz and rising crude oil prices, Japan's oil import costs have reached their highest level. Additionally, transportation and insurance costs have also risen sharply. To address these challenges, Japan, as a member of the Group of Seven, has engaged in releasing oil from its strategic reserves, which is part of the coordinated global efforts by the IEA to release 400 million barrels of oil and petroleum products.
