Misc

In economics statistics classes, students sometimes ask whether Abenomics led to an overestimation of GDP, but the reality is that if anything, GDP has been underestimated. There is a debate around Japan's input-output tables — the foundation of Japan's GDP statistics — arguing that this "Galapagos-style mammoth statistical framework should be simplified to match European and American standards," but this argument rests on a serious misunderstanding. An input-output table is a matrix describing the production and demand structure of an economy as a whole, constructed through intensive statistical surveys in a benchmark year conducted every five years. Japan's input-output tables are sometimes criticized as "Galapagos" for their granular classification of 520 commodities by 400 industries, but in fact the U.S. Bureau of Economic Analysis (BEA) uses an even finer classification running to 5,000 commodities — albeit unpublished. The disaggregation of input-output tables is not a hobby pursuit; its purpose is to approximate the technical relationships between products and industries. At the level of granularity represented by products such as heavy fuel oil and coke, the industries that use them can be identified with greater precision, and a design that makes use of such complementary information is indispensable for describing the economy as a whole without internal contradictions. If one imagines how difficult it is to measure a nation's total GDP, the challenges of statistical construction become clear: declining survey response rates, missing or inconsistent answers, and the increasingly diversified business activities of corporations all compound the difficulty. The foundation of GDP statistical construction is an understanding of productive structure, and the central role in Japan's input-output tables has been played by the Input-Output Division (IO Division) of the Economic Analysis Office within the Ministry of Economy, Trade and Industry. The successive heads of the division have maintained a high level of professional commitment — refusing to take potentially error-laden figures at face value, sensing discrepancies between the statistics and actual economic conditions, and engaging in dynamic quality management. With the advance of outsourcing to the private sector, however, only perfunctory quality control devoid of passion remains, and the pursuit of structural changes in the survey population has been lost. The nuclear accident then delivered the decisive blow. Personnel within the ministry were mobilized for accident response, and invaluable statistical expertise was lost. The IO Division no longer exists as such; it has been absorbed into a Survey and Analysis Support Office, where it is grouped together with dissemination, public relations, and website management functions. This means that the "guardian" of Japan's input-output tables is being lost. Even if there are discrepancies in the levels of the benchmark year, GDP statistics for subsequent years are estimated by linking to that base, so the problem goes unexamined — a Pandora's box, in effect. Preliminary estimates suggest that in recent years production has been underestimated across various sectors, with figures likely missing by as much as 10 trillion yen in commerce and 5 trillion yen in manufacturing. A mature opposition party, rather than simply crying "fabrication," should be questioning the adequacy of GDP measurement itself. Under a framework of private-sector utilization focused solely on checking procurement documents for deficiencies, no passion can be cultivated, and the quality of the information infrastructure built by one's predecessors cannot be maintained. What is needed once again is a distinctly human way of working — thinking for oneself, using AI as a complement, and finding genuine enjoyment in the discovery of problems.

In February 2020, it was reported that the Kure steelworks in Hiroshima Prefecture would be closed. Two blast furnaces operated by Nippon Steel Nisshin would be shut down, with the crude steel processing operations also to be closed by 2023. A major reversal of direction announced just two months after the corporate disclosure speaks to the anguish behind the decision, taken against a backdrop of stagnating global demand caused by the U.S.-China trade conflict. Kure is the third-largest economic city in Hiroshima Prefecture, accounting for approximately 10% of the prefecture's gross domestic product, with a dependence on manufacturing of 48% — far exceeding that of Hiroshima City (17%) and Fukuyama City (31%). The steel industry accounts for 27% of the gross value added by Kure's manufacturing sector, underpinning roughly 12% of the city's GDP. The closure of the steelworks, including its impact on related industries, will likely inflict damage two to three times that scale. Nippon Steel itself is reported to be facing a loss of 440 billion yen, following an impairment charge of 490 billion yen. To compete in global markets, it is necessary to endure such pain in order to raise production efficiency and expand the share of production closer to growing consumption centers. By 2030, Japan's GDP will have shrunk in relative terms to approximately 4% of world output. Putting an end to Japan's prolonged economic stagnation is impossible without transforming into globally competitive enterprises. Government support is indispensable to cushioning the pain for regional economies, but the greatest asset is the human talent cultivated at the steelworks being closed. One can only hope that the steelworkers who remain in the region will found new businesses and drive the local economy forward. The day before the closure was reported, the Low Carbon Society Action Plan Follow-up Committee of the Ministry of Economy, Trade and Industry held discussions on the steel industry's efforts to reduce CO2 emissions. Yet concerns about carbon leakage proved difficult to dispel. As the technical possibilities for higher efficiency and higher utilization rates become increasingly constrained, if the hurdles to be cleared are set high only within Japan, companies will opt for overseas production when making reinvestment decisions. Is the blast furnace closure not, in fact, a decision made under competitive conditions distorted by current energy and environmental policy? Whether the pain being inflicted on industry, regions, and the macro economy is truly necessary must be asked. The EU has constructed a list of industries exposed to the risk of carbon leakage under its emissions trading scheme, granting eligible industries a substantial number of free emissions allowances. Careful measures against leakage are indispensable to avoid inflicting unnecessary pain on the macro economy. Voluntary action as an approach to environmental policy carries a fatal flaw: it obscures the disparity in competitive conditions between domestic and foreign producers. It also carries the risk of concealing the factors behind Japan's low economic growth and presenting domestic emissions reductions as if they were the fruits of environmental policy success or corporate effort. Japan's capacity to identify its national interest from the perspectives of corporate strategy, environmental policy, and economic growth is being put to the test.

In the wake of the decline in energy demand and CO2 emissions caused by the pandemic, calls for a green recovery have grown loud. Yet the fiscal stimulus deployed by advanced economies has been directed primarily at business support and income compensation, with green investment receiving allocations of an entirely different order of magnitude. As economic activity recovers, emissions will likely return to their previous trajectory. Indeed, the dispersal of activity may itself generate a significant expansion in energy consumption. Longer-term prospects depend on the adoption of emerging technologies such as AI, IoT, and 5G — which offer the prospect of substantial improvements in energy efficiency, while also raising significant concerns about the enormous expansion of electricity consumption in data centers, among other issues. Under the vision of "Society 5.0 for SDGs" advanced by Keidanren, a model simulation was conducted to estimate the impact on the Japanese economy of the social implementation of 57 future technologies. The deployment of diverse technologies — including the digitalization of manufacturing processes, telemedicine and care robots, FinTech, InsurTech, and EdTech — is projected to accelerate the economic growth rate through 2030 from the baseline case of 0.8% per annum to 2.6%. This is comparable to the healthy growth trajectory of the United States, whose per capita GDP is currently about 40% larger than Japan's. Japan currently lags the United States significantly in labor productivity. The Japan-U.S. labor productivity gap in 2030 is estimated to remain around 30% in the baseline case, but through the aggressive implementation of future technologies, the gap narrows to just 9%. The realization of Society 5.0 points to a return to a growth trajectory in which Japan catches up with the United States in productivity terms — transcending the three decades of stagnation that defined the Heisei era. Energy productivity improvement through 2030 is projected at an annual rate of 2.2% even in the baseline case, but accelerates to 3.1% under Society 5.0 — a pace comparable to what the Japanese economy achieved in the aftermath of the first oil shock. Yet even with rapid improvements in energy productivity, the acceleration of economic growth through the deployment of future technologies — accompanied by structural changes such as the expansion of digital capital accumulation — is estimated to increase overall energy consumption in aggregate. The increase in energy demand from economic expansion has consistently outweighed the reductions achieved through efficiency improvements, and the coexistence of efficiency gains and quantitative growth in energy consumption is a pattern observed throughout the postwar economy. Technological innovation is driven by latent demand for new goods and services. Energy conservation is one such demand, but its market scale is relatively modest and insufficient to serve as the primary driver; the emergence of new products with appropriately large markets — such as robotics and medical and elderly care — will be accompanied by increased energy consumption. These projections suggest that the key to addressing energy and environmental challenges lies in the decarbonization of the supply side of secondary energy. Through the operation of next-generation renewable energy, hydrogen-fired power generation, and small modular reactors, a 17.8% reduction in total CO2 emissions from the baseline case is projected for 2030. In recent years, pessimistic views on demand outlook have been heard from energy businesses, but it should not be forgotten that these views are grounded in the experience of an exceptional period of stagnant labor productivity improvement. Strong and sustained improvement in labor productivity can be realized together with expanded inputs of capital and energy. We should look beyond prolonged stagnation and seek a vision of the future in which technological innovation, economic growth, and environmental stewardship are brought into alignment.

Half a year has passed since the economic damage from the COVID-19 pandemic began in earnest, and the first statistical signs of recovery are beginning to emerge. Japan's economic growth rate in the second quarter of this year came in at minus 10.0%, a somewhat deeper contraction than the minus 8.9% recorded during the global financial crisis. The two crises have, however, affected the Japanese economy in qualitatively different ways, and it is from a comparison of their respective recovery processes that I wish to consider the outlook for future energy consumption. The damage to manufacturing from the pandemic is shorter-lived than that inflicted during the global financial crisis, which was driven by a dramatic collapse in external demand. The export volume index, the industrial materials shipment index, and the durable consumer goods shipment index have all been recovering strongly, and the pace of macro demand recovery is faster than during the financial crisis. For industrial production as a whole, it took approximately twice as long during the financial crisis to achieve the level of recovery seen between May and August this time. The recovery has been led by the automobile manufacturing sector. Production volumes for standard passenger cars, light vehicles, and motorcycles have all roughly doubled, and by providing appropriate working environments amid advancing automation, factories have succeeded in resuming operations without generating clusters of infection. Where demand exists, manufacturing adapts quickly to new production methods that avoid the concentration of people. For services, whose defining characteristic is simultaneous production and consumption, such adaptation is considerably more difficult. The recovery in automobile production was also supported by demand for private car commuting as people sought to avoid using public transportation. Particularly among economically better-off households, there has been a shift away from collectively consumed mobility services such as trains and buses toward "own-account production" — producing those services for oneself. The office, a composite service collectively consumed by employees, has also been partially substituted by own-account production at home. For products such as split-system air conditioners, built-in kitchen systems, electric refrigerators, and electric washing machines, domestic production levels in August of this year have already surpassed the February levels that preceded the full impact of the crisis. Laptop computers were up 25% and fiber optic communication cable products up 19%, as households produce for themselves the composite services that constitute a high-quality working environment. Over the medium to long term, own-account production services will likely coexist alongside the collectively consumed services of the past. Energy consumption in public transportation and offices will not change substantially even as passenger and occupancy density declines. The replacement of old appliances will accelerate the penetration of energy-efficient durable goods, but this will not offset the additional energy consumption from expanded usage. In the near future, households will consume by choosing between own-account production services and high-quality external services. Energy demand remains weak at present, but when macro demand recovers to its former scale, energy consumption will tend to increase. There is no need to lament the expansion of consumption — what is called for is preparedness to ensure stable supply.

In November 2020, the UK government announced its "Ten Point Plan for a Green Industrial Revolution," followed five weeks later, on December 25th, by the Japanese government's "Green Growth Strategy Toward Carbon Neutrality by 2050." While both share a tendency to paint an optimistic picture without clearly articulating the logic that justifies it, the UK's Ten Points — opening with the bold message that "Britain, which led the first Industrial Revolution 200 years ago, will lead the world again" — far surpasses Japan's growth strategy in concreteness and concision. The UK Ten Point Plan, from Prime Minister Johnson's foreword onward, places strong emphasis on Green Recovery, whereas the Japanese government's report does no more than briefly note that "in Europe and the United States..." Japan did not undergo a full lockdown, and the government's primary obligation was to support the unemployed and businesses in sectors such as food and beverage, accommodation, and retail. More than 95% of construction sites across the country continued operating throughout the pandemic, with thorough infection control measures in place. Against this backdrop, support for civil engineering works or research and development — however green — could easily appear opportunistic in Japan, and lacks persuasive force. A second emphasis of the UK Ten Points is job creation. The Green Industrial Revolution is said to generate 250,000 jobs in the UK by 2030, with a breakdown provided: 60,000 in offshore wind, 50,000 each in CCUS and green buildings, 40,000 in zero-emission vehicles, and so on. Yet while the arithmetic behind the figures may be understood, the logic by which they would generate economic growth is nowhere to be seen. Jonathan Ford of the Financial Times points out that "green jobs don't come from nowhere — they replace jobs that existed before." What should be compared is the value created by the jobs before and after, and it has been argued that the economic value generated by green jobs would fall short of the work lost in coal mines and coal-fired power stations. One cannot help but raise an eyebrow at the UK government's use of gross employment figures to dress up the Green Industrial Revolution. Energy transition is painful. The real question is the "net gain," which is difficult to measure. If workers previously confined to low-productivity jobs are able to achieve higher productivity in new businesses, the net gain is positive — but in the UK's case, it appears likely to be negative. On the other hand, if some former workers had been receiving incomes disproportionate to their productivity, or if overinvestment by monopolistic enterprises had generated inefficiencies that contributed to high electricity prices, then energy transition might deliver a positive social gain through lower electricity prices. However, a report by Professor Gordon Hughes of the University of Edinburgh, based on actual cost data from more than 350 onshore and offshore wind farms in the UK, finds that the price of wind-generated electricity has not fallen — it has in fact risen — and that there is no prospect of significant decline over the next five to ten years. If generation costs continue to rise, the odds of success for the Green Industrial Revolution will be correspondingly diminished.

The massive fiscal stimulus deployed to fill the aggregate demand shortfall caused by the pandemic has received broad support from the IMF, the World Bank, and economists around the world. As a side effect, however, inflationary concerns have been mounting in the United States alongside the recovery in output and a buoyant stock market that has repeatedly set new all-time highs. With vaccination rates high, the mood in the United States is increasingly one of approaching the end of the pandemic, and accumulated purchasing power is poised to be unleashed — a situation in sharp contrast to Japan, where a fresh state of emergency has been declared. In March, President Biden approved 1.9 trillion dollars in fiscal stimulus, bringing the cumulative total to nearly 6 trillion dollars. The previous month, Professor Summers of Harvard University warned in the Washington Post that this stimulus package carried the risk of producing inflation at a level not seen in recent times. Professor Summers, who served as Treasury Secretary under the Clinton administration and is closely associated with the Democratic Party, carries considerable weight, and his concerns have been taken seriously. The basis of his argument lies in the overwhelming scale of the stimulus: whereas the Obama administration's fiscal stimulus during the global financial crisis was sized to fill roughly half of the demand shortfall, the current package amounts to three times the demand that was lost. Professor Summers flagged the risk of inflation at a level not seen in half a century. Professor Ball of Johns Hopkins University and his colleagues adjusted the U.S. Phillips curve by stripping out the effect of temporary layoffs from the unemployment rate and using the weighted median of the consumer price index as the inflation measure. Under this framework, they projected that the fiscal stimulus would reduce unemployment by 1.5 to 3.5 percentage points, pushing inflation to 2.5–3.0% through 2023, and assessed the risk of an inflationary spiral as small provided appropriate monetary policy was implemented. However, the April CPI figures released on May 12th came as a shock to markets. Urban CPI rose 0.8% from the previous quarter, showing a clear accelerating trend, and the twelve-month inflation rate reached 4.2% — the largest increase since September 2008. Fed Vice Chair Clarida continued to view the drivers as transitory, but whether that assessment is correct or whether a delayed policy response is warranted remains deeply uncertain. For long-term inflation containment, the key question is whether the Biden administration's massive infrastructure investment plan of more than 2 trillion dollars can deliver productivity improvements in the U.S. economy. However, the plan includes investments of questionable productivity benefit, and uncertainty is substantial. Investment in the energy transition is one component of this, required on a sustained basis over decades and necessarily coexisting with existing systems during the transition period. Productivity is likely to retreat, or at minimum its improvement will be considerably delayed, and the dampening effect on inflation will be weak. Should the U.S. economy head toward prolonged productivity stagnation, the risk of stagflation — the simultaneous occurrence of inflation and recession — is also present. The path of energy transition in the United States will likely be significantly reshaped by how economic conditions evolve going forward.

In June of this year, the "Green Growth Strategy Accompanying Carbon Neutrality" was unveiled. Its projected employment creation effect, measured as a net figure, is stated as 8.7 million jobs in 2030 and 18 million jobs in 2050. With total employment in 2050 estimated at around 50 million, this would mean one in three workers engaged in green jobs — an enormous number. In November of last year, the UK government presented a plan to create 250,000 jobs by 2030. An independent Green Jobs Taskforce was established, and its report was published in July of this year. The report finds that not all current green jobs are good jobs, and sets out fifteen recommendations for creating high-quality green employment. It emphasizes that long-term investment in human capital is indispensable for quality employment, and calls on the government to present a concrete roadmap for the energy transition. The employment creation figures put forward by the Japanese government are far too large. When the author inquired with the Ministry of Economy, Trade and Industry about the assumptions and methodology behind them, the response was that there were "no plans to make them public." Japan's 2030 target is 4.4 times larger than the UK's and 2.7 times larger in GDP terms — and the UK figure is gross, meaning the net figure would be considerably smaller still. A net job creation figure of 8.7 million goes beyond mere ambition and gives the impression of distorting the information base on which policy is formulated. What is needed in the energy transition toward decarbonization is not a performance of stacking up employment numbers, but a problem-finding role that surfaces the real challenges along the transition pathway. The logic by which green investment would raise productivity is nowhere to be seen. Green investment requires more capital than conventional approaches to produce the same level of output, and will almost certainly damage total factor productivity. Unless competing nations are similarly compelled to undergo the same transition, the competitiveness of Japanese industry will decline, and the value generated by workers will inevitably fall. Whether high-quality green jobs can actually be created depends on the internationally harmonized internalization of carbon emission costs — and the international coordination required to achieve this, still far from realization, remains the greatest obstacle. What is required of the government is not "resolute implementation," but flexible thinking under differing conditions.

Prime Minister Kishida's Council for the Realization of a New Form of Capitalism published an "Emergency Proposal" on November 8th. Its defining feature was its fiscal scale: an economic package of 55.7 trillion yen in fiscal expenditure terms — the largest ever — was approved by the Cabinet, and new government bond issuance for fiscal 2021 is expected to exceed 65 trillion yen. The government has made clear its willingness to accept fiscal deficits. More worthy of attention than the distribution strategy is the shift in the foundations of the growth strategy. In June of this year, the Ministry of Economy, Trade and Industry published its "New Directions in Industrial Policy." The new directions call for a transition away from conventional industrial policy aimed at creating favorable market conditions toward a more powerful industrial policy involving "large-scale, long-term, and planned" fiscal mobilization for "market creation" oriented toward solving medium- and long-term challenges. In energy and environmental policy as well, there are signs of a move toward an even larger role for government than before, with the possibility that levies to promote renewables, costs such as building insulation, and even the increase in energy prices themselves may be offset through subsidies. If direct burdens on consumers and producers are avoided, will the public accept further bond issuance? The case for expansionary fiscal policy as a way out of prolonged economic stagnation has been debated since before the pandemic. MMT advocates sustained fiscal deficits and calls for the permanent deferral of debt, while the New View locates the causes of economic stagnation on the supply side and prescribes investment tax cuts and productivity-enhancing infrastructure investment. What is required of the government is a rigorous examination of the content of expansionary fiscal policy and a readiness to reverse course depending on circumstances. Fiscal policy shifts should not be endorsed without thinking through how funding can be secured when economic conditions change. The pandemic generated broad consensus in favor of accepting fiscal deficits, but its durability is questionable. Professor Summers, a central scholar of the New View, sounded early warnings about the scale of the Biden administration's stimulus package out of concern over inflation, and it can now be said that his argument has been entirely vindicated. There is much noise about the world having shifted to expansionary fiscal policy, but its sustainability remains in doubt. Acceptance of fiscal deficits does not amount to endorsement of a "big government" industrial policy. If the government intervenes to create markets, it risks deepening dependence on public procurement and trapping the private sector in a nest of vested interests. The expansion of subsidy dependence has likely been a major factor in the loss of dynamism among Japanese companies over the past twenty years. Government demand creation may offer companies a temporary respite, but it is fragile and fleeting, and there is no shortage of examples where private enterprises have declined in the wake of the feast. If subsidies are wielded as a magic wand in a "big government" energy and environmental policy, they will rigidify corporate asset structures and business models. Energy transition requires a long time horizon and is subject to enormous uncertainty — both in terms of available technologies and the economic environment. No one today knows what an efficient path to decarbonization looks like for Japan. Even in pursuing expansionary fiscal policy, Japan must not forfeit the flexibility that would allow its economy to adapt to technological and environmental changes along the transition path. Against a scattershot approach to policy, the call for "wise spending" rings hollow.

France's economy minister described the surge in crude oil and natural gas prices triggered by Russia's invasion of Ukraine as having an impact comparable to the first oil shock. The erosion of the resilience to oil price surges that had been built up since the oil shocks was already being flagged as a concern more than ten years ago. In 2009, the European Commission sounded the alarm that a sustained rise in "real unit energy costs" (RUEC) had been observed across major economies since the mid-1990s, with the most severe increase found in Japan. Assessing the impact of energy price surges requires evaluating prices inclusive of secondary energy such as electricity, alongside the "real energy price" — the relative price obtained by deflating by the price of domestically produced goods and services. If domestic output is internationally competitive enough to pass higher costs through to production prices, the impact of a nominal energy price increase can be mitigated. Conversely, where energy prices rise due to domestic factors — such as the reckless promotion of renewables regardless of cost — and companies are unable to raise the prices of goods exposed to international competition, the same nominal price increase inflicts far greater damage. In Japan, where deflationary conditions have persisted, the real impact is more severe. A further consideration is energy productivity. In economies where regulations such as the Energy Conservation Act and subsidy programs have driven the adoption of energy-saving equipment beyond what economic rationality would dictate, cheap energy-saving technologies are already saturated, and the scope for adaptive response to price increases is limited. In the United States, by contrast, where energy-saving investment has not been front-loaded, rising prices have rendered previously uneconomical energy-saving technologies viable, helping to cushion the impact. RUEC is an indicator obtained by dividing the real energy price by energy productivity, and as such serves as a composite measure of resilience that captures this information. Throughout the postwar period, Japan has consistently faced energy prices roughly 1.5 to 3 times higher than those in the United States. On the eve of the high-growth era, Japan's total factor productivity was approximately half that of the United States, meaning that similar products had to be priced at roughly half U.S. levels to win demand in the market. What bridged the gap between high input prices and low output prices was cheap labor: at the time, Japan's hourly wages were no more than 20% of U.S. levels. Subsequently, over the half century through 2010, the Japan-U.S. gap in real energy prices narrowed, driven by the convergence of production prices between the two countries during Japan's high-growth years and by corporate efforts to secure stable and affordable energy supply. At the same time, however, this progress dulled awareness of the underlying problem. After the earthquake disaster, electricity prices in Japan rose due to the shutdown of nuclear plants and the promotion of renewables, while the United States benefited from the shale revolution, causing the Japan-U.S. real energy price gap to widen again. As the real price gap expanded, Japan's advantage in energy productivity also narrowed, and the country is now approaching its most vulnerable position in the postwar economy. Promoting energy conservation domestically beyond the bounds of economic rationality will only invite further hollowing-out and economic stagnation. Expanding renewables remains costly relative to providing electricity of equivalent quality. For Japan's energy transition, a narrow transition pathway must be sought — one that raises the overall efficiency of the economy and restrains the widening of the RUEC gap.

Prime Minister Kishida emphasized that "while prices in Europe and the United States are rising by 7–8%, Japan is maintaining an increase of around 2%," but looking at only one facet of a situation may prevent one from recognizing the risks it conceals. Just as Professor Leontief once described economic analysis as "like reconstructing the blueprint of a complex engine," without the ability to imagine how a complex engine actually moves, latent risks go unfelt and prescriptions go wrong. As Professor Summers warned last spring of the risk of an inflationary spiral in the U.S. economy, U.S. CPI over the twelve months through May rose 6.0% even excluding food and energy, with inflation above 4% on this measure persisting for twelve consecutive months. In Japan, meanwhile, CPI has continued to rise by 0.3–0.4% month-on-month since the start of this year, and with the added effect of yen depreciation, concern has grown over the decline in real incomes due to rising import prices. Japan's inflation, however, is a cost-driven phenomenon — stemming from energy resources and the weak yen — and the capacity of demand expansion to drive price increases remains fragile. What matters here is the distinction between two gauges: the CPI (consumption prices) and the GDP deflator (production prices). Taking a restaurant as an example, the price paid at the till is the consumption price, while the production price measures the price of the value added truly created by that restaurant alone, after deducting the cost of raw materials, energy, rent, and similar inputs. The two can at times move in opposite directions. Even if menu prices rise, if the prices of energy and ingredients rise by more, production prices may actually fall. In the first quarter of this year, U.S. consumption prices rose 6.2% year-on-year while production prices rose even further at 6.8%. The price increases themselves are undesirable, but behind them lies strong demand pulling prices upward. In Japan, meanwhile, consumption prices rose 0.5%, while production prices fell by 0.8%. Japanese producers find themselves unable to pass on rising energy and import costs and are compelled to adapt by lowering their own production prices. Even as the world faces the same nominal rise in crude oil prices, the real burden falls more severely on Japan. Yen depreciation carries both harm — in the form of rising import prices — and benefit, by creating room for domestic producers competing with imported goods to raise their prices. Since the Plaza Accord, tolerance for excessive yen appreciation has been a source of deflationary pressure, compelling wage suppression at home; a sustained weak yen has the potential to reverse that tendency and create room for nominal wages to rise. The current excessive yen depreciation represents an ideal opportunity to sell overseas assets and repatriate capital domestically, but the structural reason this is not happening is the absence of an environment that makes returning to domestic production attractive. Demands for energy conservation that go on without end and without technological grounding, the expansion of renewables that makes higher electricity prices inevitable, the erosion of trust in stable electricity supply — the government, captive to a reckless rush toward carbon neutrality, has lost sight of the foundations on which the Japanese economy rests and of the true role of energy policy. It is precisely Japan's energy-intensive manufacturing industries that boast internationally high productivity. Policies that see only one facet of reality are deepening structural challenges.

What is the total cost of electricity in Japan today? Distinguishing between the electricity sector as an "industry" and electricity as a "product" has become increasingly difficult due to the diversification of utilities and the expansion of new-entrant suppliers and self-generation, making it harder even for electricity businesses to see clearly the burden being borne by the national economy as a whole. Along the path of long-term energy transition, close attention must be paid to the energy cost burden along that route. If the accelerator is pressed on inefficient decarbonization policy while cost increases remain difficult to see, the high-cost structure that would emerge in a few years' time could become a heavy drag on the Japanese economy. With this problem in mind, the author's research group has been constructing an Energy Cost Monitoring (ECM) framework since April of this year. The latest ECM captures conditions through August of this year. Total electricity consumption in August exceeded the same period of the previous year by 2.2% as recovery from the pandemic continued, but its cost increased by as much as 37%. A simple projection assuming that August price levels persist through December of this year estimates that the total electricity expenditure for calendar year 2022 will be approximately 6 trillion yen higher than the previous year. Total electricity consumption expenditure is expected to reach 24.2 trillion yen, far surpassing the previous peak in the Japanese economy of 19.8 trillion yen recorded in 2014. The pass-through of primary energy price increases caused by the invasion of Ukraine to retail electricity prices has yet to be fully reflected, and the projected year-on-year increase of 6 trillion yen within this year could even be described as a conservative estimate. A similar simple projection suggests that total final energy consumption expenditure for this year is expected to be 13 trillion yen higher than the previous year's figure of 37.4 trillion yen. The enormous surge in cost burden is a global phenomenon, but it also has characteristics specific to Japan. The rise in household consumption prices in the second quarter of 2022 was 6.7% in the United States and 6.6% in Germany, compared to a relatively contained 2.3% in Japan — but this does not signify the success of price-suppressing policies. Over the same period, the GDP deflator showed 7.6% in the United States and 5.9% in Germany, against minus 0.3% in Japan, with deflationary pressure remaining firmly entrenched. Japanese producers are insufficiently passing through cost increases, and even as the world faces the same rise in energy costs, Japan's real burden is becoming proportionally greater. At the same time, Japan's prolonged deflationary trend has enhanced the competitiveness of macro-level production prices. Under the excessively depreciated yen, the Japanese currency is currently undervalued by as much as 35%, bringing price competitiveness to its strongest level in nearly half a century. Exports rose by approximately 20% year-on-year in August, with the pace of recovery exceeding even the experience of the Abenomics recovery period. While the widening trade deficit is primarily attributable to rising fossil fuel costs, international crude oil prices have been declining since June. For domestic manufacturing recovery to be sustained under the favorable conditions provided by a weak yen, containing future electricity costs will be the crucial test.

Japan's electricity demand peaked at 1.20 trillion kWh in fiscal 2007 and has continued to decline, with fiscal 2022 expected to recover to only around 1.02 trillion kWh. Although real GDP expanded by 3.7% over these fifteen years, electricity consumption has fallen — a trend that might appear to reflect the fruits of conservation efforts by households and businesses. Behind that surface, however, the import ratio of electricity has been expanding. Japan, not connected to any international power grid, has zero direct electricity imports. Yet when Japanese companies scale back domestic production of electricity-intensive intermediate and final goods and switch to imported alternatives, this is effectively the same as importing electricity indirectly. While this may be the cheapest way to import electricity, the reaction it produces is a deflationary force that reduces domestic effective demand. According to estimates of the indirect electricity import dependency (EID) based on input-output tables, Japan's EID as a single-country economy stood at 21.8% in 2015. Japan's EID has undergone two major turning points. From the low teens in the 1960s, EID rose to around 20% in the wake of the two oil shocks, before reversing in 1980 and successfully being brought down to 10.3% by 1995. This achievement is thought to owe much to the trust built through the realization of oil substitution via nuclear power and LNG-fired generation and the dramatic reduction in power outage hours — demonstrating that stable supply could be maintained while containing price increases. From 1995, however, EID turned upward again, retreating by 2018 to 22.8%, back to the levels of the late 1970s. Of the total decline in electricity demand from peak fiscal 2007 to fiscal 2022, the rise in EID over that period — from 19.2% to 22.8% — is estimated to have inflated the apparent reduction in domestic demand by roughly one third. Taking a longer view, if the fiscal 1995 value — the turning point at which EID resumed its upward trend — is held fixed, the hypothetical demand figure for fiscal 2022 would exceed the actual figure by 0.18 trillion kWh. This suggests that even under the current final demand structure of the Japanese economy, 1.20 trillion kWh of electricity demand would have existed had the import dependency ratio been kept at its 1995 level. The factors behind the renewed rise in EID lie on the supply side. By the 1990s, cheaply available energy-saving technologies were already becoming constrained, and concerns that further energy-saving investment would undermine overall production efficiency had grown substantially. Against this backdrop, the strengthening of domestic measures for energy conservation and emissions reduction, the promotion of renewables leading to higher electricity prices and threats to stable supply — the reaction to these policies compelled companies to adapt by shifting production overseas. It is this dynamic that is likely to have driven the sustained rise in EID. The visible stagnation in electricity demand has tended to be interpreted as the inevitable result of economic downturns or the outcome of conservation efforts. The less visible expansion of indirect electricity imports, however, has emboldened the government to deepen its confidence in further regulatory tightening, while simultaneously serving as a powerful and entrenched deflationary force — draining effective demand and driving Japan's prolonged economic stagnation.

The roughly two-year surge in energy prices has entered a brief pause, owing to the price shock mitigation measures for electricity and gas (totaling 3.1 trillion yen) scheduled to run for nine months from meter readings in February 2023. However, this has done no more than suppress the immediate direct burden through subsidies, and the future trajectory of prices remains highly uncertain. International spot prices for natural gas fell sharply from their peak in August of last year, but in Japan — where long-term contracts had helped contain the impact of the price surge — import prices continued rising through January of this year. In Europe as well, with China's full demand recovery anticipated, IEA Executive Director Birol has emphasized that "Europe has not yet emerged from the crisis." The subsidy-based mitigation measures have drawn considerable criticism from economists, who argue that they impede the consumption restraint that rising prices would otherwise achieve. However, such faith in the price mechanism rests on an overestimation of the price elasticity of energy consumption. According to the ECM, the comprehensive price of final energy consumption rose by 71% from January 2021 through January of this year, just before the mitigation measures took effect. Over that same period of more than two years, energy consumption barely changed, placing the elasticity close to zero. Even restricting the analysis to the post-2022 period of declining consumption, and applying a generous estimate, the price elasticity comes to no more than 0.24. The experience of the historically unprecedented price surge in recent years would suggest that the price elasticity of energy consumption has indeed been low. Model-based assessments that continue to offer optimistic scenarios in which the energy transition can proceed at low cost invariably embed overestimates of both price elasticity and technological innovation. The trend in energy consumption during this period divides broadly into two phases: an increase in 2021 and a decline thereafter. The first half strongly reflects the recovery from the pandemic, with consumption returning to pre-pandemic levels by end-2021. At the time, Green Recovery was proclaimed with almost no supporting evidence, but the reality was nothing more than a return to the pre-COVID trajectory. While the measured price elasticity is low, its interpretation also warrants care. The first concern is that it fails to capture the negative externalities produced by consumption restraint. Real-world reductions in consumption may be achieved at a non-monetary cost: in areas lacking alternative means of transportation, reduced energy use may constrain how people spend their leisure time, and the increased financial burden may be suppressing spending on education. Over the medium to long term, adverse effects on health, schooling, and employment may follow. The second concern is that price elasticity estimates incorporate the effect of offshoring electricity-intensive production. Carbon neutrality declared without economically viable means of achieving it depends on expectations of future technological breakthroughs and dramatic cost reductions, and companies — while offering nominal expressions of support — are quietly proceeding with the relocation of electricity-intensive production overseas. In Europe, it is reported that even major German chemical companies are positioning themselves to cut domestic employment and shift investment abroad. The focus of attention is shifting away from the price surge itself toward its medium- and long-term consequences.

The surge in energy prices in 2021–22 left deep scars on the global economy. In response to the energy security risks that materialized, major economies are exploring divergent paths of adaptation. While some countries have shifted toward expanding the use of nuclear power, Germany — having already phased out nuclear — is seeking a way forward through further promotion of renewables and energy efficiency. Companies, meanwhile, are being compelled to reassess their global production configurations as they watch closely the policy directions of various countries toward net zero. Germany, under the banner of "Efficiency First," has introduced further energy-saving measures through its Buildings Energy Act. Heating systems newly installed from January 2024 onward are required to operate on at least 65% renewable energy, and existing fossil fuel-based heating systems are to be banned from operation by 2045. These heavy-handed policies have caused various disruptions in the market, and forecasts that unretrofitted properties could lose value have already begun to manifest as downward pressure on housing prices. Vonovia, Germany's largest real estate company, has placed climate protection as its top priority, yet was compelled to sell 560 million euros worth of properties to U.S. investors at a 7% discount in order to raise funds. In the heat pump market, where substantial demand growth had been expected, reports emerged that Germany's Viessmann sold its heat pump division to U.S.-based Carrier Global — prompting widespread concern that history may repeat itself, as it did with solar panels. Major German chemical companies such as BASF are planning to cut thousands of domestic jobs while shifting investment abroad, as future energy supplies at prices comparable to what was once paid for Russian pipeline gas can no longer be anticipated. The retreat from domestic production is not confined to multinational corporations. A survey by the Federation of German Industries (BDI) found that 16% of responding companies have already taken concrete steps to relocate part of their production and employment outside Germany, with a further 30% having plans to do so. The German government is considering substantial price subsidies to suppress industrial electricity prices, but the more fundamental problem lies in the incompatibility with climate policy, which is driving up the cost of CO2 emissions. The harms of imposing disproportionate burdens on specific segments — such as energy efficiency measures and renewables — beyond internationally harmonized carbon price levels are intensifying. There is also an inherent dilemma: the maintenance and expansion of government-created demand, which has enhanced market predictability, has simultaneously increased the probability of success for China's state-led manufacturing model, further disadvantaging the competitive position of private-sector firms within Germany. The result has not been a triumph of climate policy, but rather a powerful driver of increasing global fossil fuel consumption and CO2 emissions. The failure of carbon leakage that has persisted for a quarter century appears poised to repeat itself. Industrial production data for April of this year shows Germany still mired in prolonged stagnation, running 2.4% below its 2015 level. Japan's stagnation is even more severe, at minus 4.4%. While the attractiveness of domestic production has grown amid de-risking from China and tolerance for a weaker yen, Japanese companies are quietly proceeding with their own adaptation — scaling back domestic production of electricity-intensive goods. What Germany and Japan share is a widening divergence between corporate growth opportunities and macroeconomic growth. If the broader macroeconomy is damaged, the long-term economic burden of net zero will not be accepted.

Japan has been unable to chart an exit strategy from its price subsidies on fuel and electricity. While the original rationale of cushioning against sudden price shocks is already fading, criticism is mounting that prolonged subsidies are distorting the price mechanism. According to estimates by the authors' ECM, total consumer spending even after subsidies is projected to increase by as much as 11 trillion yen from pre-COVID 2019 levels, and when indirect burdens are included, the total increase reaches 16 trillion yen compared to before the pandemic. The global push for net-zero policy is keeping the underlying trend of energy prices elevated. Singapore's per capita GDP exceeded 80,000 dollars last year, reaching 2.4 times that of Japan. To summarize Singapore's approach to low-carbon transition: it has achieved decarbonization by shifting its power mix heavily toward natural gas, without suppressing domestic investment by energy-intensive manufacturing industries and without inducing excessive energy conservation. In 2000, roughly 80% of its electricity generation relied on oil-fired power; over the following twenty years, it raised its dependence on gas-fired generation to 95%. The key difference from Japan lies in the fact that Singapore Power (SP), the state-owned utility, has not been compelled to suppress cost pass-through. Despite average import prices last year being 2.1 times the 2019 level — a more severe hit than Japan experienced at 1.7 times — SP Group recorded revenues of approximately 700 billion yen (in yen terms) last year. The surge in fuel prices was passed through to electricity prices in full. A second difference is that the government has made a forthright public case for the rationality of cost pass-through and the importance of setting electricity prices correctly. Government support was limited to low- and middle-income households, with a monthly rebate of just under 10,000 yen provided to offset utility bill increases. What matters more than temporarily suppressing consumer prices is maintaining stable supply and preserving the financial resilience needed for the long-term journey to net zero. Korea Electric Power recorded a substantial loss again in the second quarter of this year, marking nine consecutive quarters of losses. Japanese utilities have also begun passing through costs, albeit with a lag, but were forced to absorb large losses in the previous fiscal year. Through the assessment of regulated tariffs and government intervention in capacity markets, utilities have found it increasingly difficult to earn legitimate returns commensurate with their costs, and there are voices saying that investment in domestic thermal power generation is no longer viable. But this is not a problem of input prices — it is a distortion caused by the suppression of output prices. Healthy cost pass-through is what encourages investment and is itself a source of the demand that has driven global fossil fuel prices higher. The inability to undertake reinvestment in high-efficiency thermal power generation in Japan is not an inevitable consequence of decarbonization or liberalization — it is the result of government intervention to suppress prices. Keeping electricity prices in check should be a cornerstone of achieving the optimal energy mix, but if that goal is papered over in the short term through price subsidies, underinvestment becomes inevitable. This raises the risk to stable supply and erodes the private sector's financial capacity to pursue the energy transition. The sustainability of global net-zero policy is not assured either. The role of the private sector — which is capable of responding flexibly to changes in the market environment and advances in technology — must not be constrained.

Last December, Kansai Electric Power announced the cancellation of a planned LNG-fired power plant (rated output: 3.7 million kW) in Wakayama City, booking a special loss of as much as 120 billion yen. This business decision, which cited sluggish demand as one factor, carries a weight that cannot be dismissed simply as a "decarbonization shift." What brought about that demand stagnation, and will it persist into the future? At the root of stagnating electricity demand lies the stagnation of domestic production — driven by declining exports of finished goods and the expanding importation of electricity-intensive intermediate goods. And the change in those underlying conditions is itself a consequence of the energy and environmental policies pursued to date. A negative spiral may be at work. The pursuit of policies focused on the superficial outcome of reducing energy consumption has contributed to the hollowing-out of domestic industry; as businesses adapt, power supply plans are revised downward. This compounds the risk of undermining stable supply, discourages domestic investment, and as the introduction of capital embodying new technologies is delayed, industry steadily loses competitiveness. The search for the causes of demand stagnation also overlaps with the task of evaluating the divergence between past demand forecasts and actual outcomes. In the late 1990s, following the Kyoto Conference (COP3), computable general equilibrium models for energy analysis were used in electricity supply-demand projections. Actual electricity demand during the first commitment period (2008–12) came in slightly above the model estimates, but that relationship reversed in the 2010s. Government projections reverted to bottom-up models, into which ambitious energy-saving targets were continually embedded, yet realized figures fell short of and then declined below forecasts. This suggests that structural changes not captured by the models were at work in the real economy. The structural change that unfolded over the past quarter century and became particularly visible from the early 2010s onward was the offshore migration of electricity-intensive goods production. As opportunities to introduce economically justified energy-saving technologies became increasingly limited, policies demanding emissions reductions with little technological foundation were tightened, and companies were quietly compelled to shift domestic production overseas. It would be a mistake to resign oneself to the inevitability of future electricity demand stagnation in a society with a declining population. The global economy has sustained growth of 2–3%, and while the fall of wages for homogeneous labor to half U.S. levels reflects a failure of Japanese economic policy, it also means Japan has accumulated considerable untapped growth potential. Japan should pursue the revival of its manufacturing sector and an expansion of exports while sustaining a weak yen environment; affordable and stable electricity supply is the foundation for doing so. There are also numerous technology-driven sources of demand growth, including digitalization and the spread of generative AI. With decarbonization as a goal sharpened in isolation — without adequate technological foundations or effective international institutional design in place — economies that have moved ahead with low-carbonization have stagnated, while economies outside that effort have expanded and global emissions have risen. This failure has been repeated. The Japanese government congratulates itself on keeping emissions reductions toward carbon neutrality on track as a policy achievement, but it is nothing more than the byproduct of Japan having recorded the weakest economic growth among advanced economies.

The Green Recovery, heralded as the path to economic revival from the pandemic, has yielded hollow results. Energy consumption that fell during lockdowns recovered to pre-pandemic levels within roughly a year in the United States and South Korea, and in China it returned to its prior growth trajectory within just a few months. Energy transition is a long-term process requiring structural transformation of the economy, and it was entirely foreseeable that demanding unnecessary pain during a period of severe recovery would prove untenable. On the path toward energy transition, no country can sustain policies that cause energy prices to surge or undermine stable supply through the cost increases and regulations that the transition entails. The concern is significant precisely because energy transition is not underpinned by genuine "real demand." Even where some private companies seek to identify growth opportunities, every one of those opportunities depends on "government-created demand" manufactured by policy. With EVs, as that policy support has faded, what is emerging is the considerably leaner reality of actual underlying demand. Beyond the difficulty of realizing policies unsupported by real demand, the coherence between ends and means must also be interrogated. Under the current international framework — the Paris Agreement — which leaves enormous variation across countries, the efforts of advanced economies are more likely than not to prove counterproductive for global emissions reduction. Carbon leakage, whereby production simply shifts to China, India, and ASEAN nations with lower reduction targets, causing global emissions to increase rather than fall, is not a theoretical possibility but a robust empirical reality observed across the quarter century since the Kyoto conference. Japan's GX (Green Transformation) is a several-fold inflation of the fantasy of achieving green growth through a 25% emissions reduction that was once promoted under the Democratic Party administration — the largest policy folly in postwar Japanese economic history, constructed without technological or economic evidence. Policymakers have been absorbed in mapping a path toward energy transition through cost-minimization modeling, yet the shape of the "minimized" cost increases is never actually shown, and what is offered is pseudo-evidence that averts its gaze from the very feasibility of the exercise. The question that truly needs to be asked is not how to minimize costs subject to emissions constraints while holding output constant, but rather how the constraint of transition itself affects production. Over the past thirty years, the Japanese economy has fallen far behind the U.S. economy in terms of economic efficiency. To follow the United States even in turns when it is pursuing inefficient resource allocation would be nothing short of negligence. In the author's view, the further pursuit of inefficient policies in Germany and Japan — particularly in energy-intensive industries — is likely to exert a substantial effect in drawing production back to the United States, and this dynamic risks causing the U.S. to overestimate the policy effects of the IRA. Like a silken cord slowly tightening around the throat, the harms of GX are difficult to see. Along that path, close attention should be paid to indicators that can be observed continuously and in near real time and that are comparable across major economies. At the end of March this year, we published an Energy Cost Monitoring (ECM) report providing preliminary estimates of the real energy cost burden across eight countries: Japan, the United States, China, South Korea, Germany, Italy, France, and the United Kingdom. Going forward, we intend to build an evidence base that captures both the international disparity in real cost burdens and the latest production trends in energy-intensive industries — which serve as a litmus test for the harmful effects of policy.

The world is watching closely as China's economic growth slows. The growth rate shown in official statistics reflects only a modest deceleration of roughly one percentage point annually compared to the pre-pandemic period, but the inventory adjustment in the real estate market is considerably more severe. Revenue from land-use rights sales, which had underpinned approximately 40% of local government income, has declined amid the slump in the property market, placing mounting pressure on public finances. Secondhand housing prices fell more than 10% between mid-2021 and end-2023, and the success or failure of the government's efforts to stem the bleeding is being closely watched. To compensate for weak domestic demand with external demand, the Chinese economy has launched into aggressive price competition, sharply cutting export prices. China's greatest hopes are pinned on what are called the "New Three" — solar cells, lithium-ion batteries, and electric vehicles — which by end-2023 had grown to account for nearly half the export value of the old "Big Three" (home appliances, furniture, and apparel). When excessive price competition rooted in China's overcapacity began to take hold, it was government-created demand in advanced economies — driven by deliberate policy choices — that came to the rescue of Chinese producers. Back in 2012, Japan's Feed-in Tariff (FIT) law played that role. At the time, proponents of renewable energy promotion in Japan argued that the policy would nurture domestic industry and drive down prices; instead, the domestic content rate collapsed and import prices rose by roughly 20%. This served as a lifeline for Chinese manufacturers, with losses incurred through fierce price competition later recouped after competitors withdrew from the market. The Netherlands also became a savior by rapidly expanding its solar power share to 14% by 2022, but that feast came to an end by late 2023, and solar cell export values have since fallen to half their peak. Tokyo is reportedly set to introduce mandatory residential solar panel installation from next fiscal year, but with human rights concerns surrounding Chinese production now attracting international scrutiny, a savior may not appear again. Since the pandemic, China has rapidly expanded exports of lithium-ion batteries and electric vehicles. In May of this year, the Biden administration announced a 100% tariff on EVs imported from China, and in June the European Commission indicated it would impose additional tariffs of 17.4–38.1% on top of the standard 10% automotive tariff. For Chinese companies that had been pressing hard on the accelerator over the past few years, this sudden braking by the West will come as a severe blow. If the world tolerates the costs of protectionism for some time, it is China whose growth model faces collapse. What sustained China's remarkable rise over the past quarter century as the world's factory was the pursuit, in Europe and Japan, of an apparent decoupling of economic growth from CO2 emissions. This approach in fact led to an increase in global CO2 emissions, yet decarbonization policies accelerated without reflection, continuously placing green demand before Chinese government and enterprises. Should what had seemed a highly predictable opportunity prove to be a mirage, excess assets in manufacturing — on top of those in real estate — would become pronounced, and the growth model that has defined the past twenty-five years would suffer devastating damage.

I was struck by the appearance in the Nikkei Shimbun this past September of an article titled "Decarbonization: Action Over Argument." A posture that demands action while dismissing the need for economic reasoning is not the role one should expect of the media. Decarbonization technologies remain expensive, and as long as no institutional framework exists to ensure that major nations compete on a level playing field in bearing the costs of emissions reduction, "action over argument" risks inflicting serious damage on the economy and society. The risks are already materializing. Energy-intensive industries in Japan and Germany have experienced a rapid production decline of as much as 20% in the years since their post-pandemic recovery. China, by contrast, has expanded production by more than 20%. It is the divergence in competitive conditions driven by differing energy policies across nations, and the gap between domestic and international energy prices, that has brought about the decline of Japan and Germany and the rise of China — a dynamic that has in fact led to an increase in global CO2 emissions. While the expansion of profits in Japan's steel industry owes much to the external windfall of a historically weak yen, Japanese companies have tended to underestimate that good fortune, and with little sense of urgency, are pressing ahead with decarbonization policies. The concept of the "wicked problem," first categorized half a century ago, describes challenges for which it is extraordinarily difficult to approach a solution, and where a remedy believed to be correct may prove counterproductive. Contemporary decarbonization is a textbook example. When confronting problems of this nature, the media and researchers must grasp how policies are reshaping the economic and social landscape, and must never stop questioning the legitimacy of the policy instruments being employed. Professor Takenori Inoki once observed that Japan's media had long been inclined to "avoid analyzing and debating highly sophisticated and complex issues," and presciently warned that this tendency "becomes particularly problematic when internationally contested disputes arise." In the author's experience, the media have moved beyond merely avoiding analytical debate on the complex issue of decarbonization to actively avoiding engagement with its underlying economic logic altogether. Clemens Fuest, chief economist at Germany's Die Welt, has argued that the spiral of interventions by Federal Economy Minister Habeck has done nothing to produce a "green economic miracle" and has continued to weaken the German economy. He criticized a system in which, rather than the most innovative companies being recognized in the marketplace, it is those with the most effective lobbying that win subsidies and support — warning that such a path would send "Germany plummeting into an industrial museum." Japan's steel industry, too, while well aware of the difficulties of decarbonization, appears to have increasingly engaged in activity that closely resembles sophisticated lobbying. The government, for its part, dispenses large subsidies while staging the appearance of on-track domestic emissions reductions and a successful green transformation — indefinitely shelving industrial hollowing-out as a perennial concern to be revisited later. This collective shortsightedness — in which government and industry move in lockstep while the media offers uncritical acquiescence — will delay the necessary course correction and allow long-term economic damage to compound to an enormous scale.

The draft of Japan's 7th Strategic Energy Plan stated that "economically rational measures should be prioritized in order to suppress as much as possible the cost increases associated with decarbonization." However, the most pressing challenge for the Japanese economy is not to limit the extent of further cost increases driven by decarbonization policy, but to reduce energy prices themselves. The gap between domestic and international energy prices, which has widened considerably in recent years, has reached a critical juncture. Calculating a comprehensive energy price differential requires complex computations that depend on differences in industrial structure and energy consumption patterns across countries. A distinctive feature of the recent period of price surges is that it coincided with a significant depreciation of the yen. Converting yen-denominated energy prices into dollar terms at the depreciated exchange rate makes Japanese prices appear relatively low. For this reason, a comparison using the "Real Price Level Index (Real PLI)" — derived by dividing the energy Price Level Index (PLI) by the macro-level PLI for output — is more informative, as it extracts a more stable trend that is independent of exchange rate fluctuations. According to the Energy Cost Monitoring report published in February 2025, Japan's Real PLI for total final energy consumption in the fourth quarter of 2024 is estimated to have risen to 3.0 times that of the United States. This means the price gap has widened by approximately 30% compared to the 2015–19 pre-COVID average of 2.3 times. Looking at electricity alone, Germany and the United Kingdom stand out as particularly expensive; however, when measured by the Real PLI for total final energy consumption, Germany stands at 2.6 times the U.S. level, while the United Kingdom and China are at 2.5 times and France at 2.4 times — all considerably lower than Japan. The rise in domestic oil refining costs, not only the yen-denominated cost of crude oil imports, is also a significant contributing factor. The second Trump administration in the United States has shifted course toward suppressing domestic energy prices through the pursuit of energy dominance. Should Japan proceed with implementing the 7th Strategic Energy Plan on the foundation of its decarbonization policies, a further widening of the domestic-international price gap would be inevitable. In Germany, the acceleration of decarbonization policy from the latter half of the 2010s onward began to erode domestic production in energy-intensive manufacturing industries, with the phase-out of nuclear power and coal further driving up prices and contributing to industrial hollowing-out. For 2023–24, two consecutive years of negative growth appear all but certain, and continued downward revisions for 2025 remain a strong possibility. What is critical to understand is that narrowing Japan's domestic-international electricity and energy price gap is fundamentally incompatible with the continuation of nearly all decarbonization policies — with the exception of promoting nuclear power. Unless Japan demonstrates a resolute commitment to reducing real energy prices that have expanded to their highest levels in the postwar era, industrial hollowing-out driven by both price and non-price factors will advance steadily. There is no time to delay the transition away from policies that have lost touch with reality.