Of all the things Shinzo Abe thought might undo his legacy as economic savior, Iran may well have been the furthest risk from the Japanese Prime Minister’s mind.

But less than two weeks into 2020, the specter of renewed chaos in the Middle East is upending the calculus in Tokyo. It barely avoided a recession, imperiling its longest expansion since the 1980’s.

Now, Tokyo confronts the risk of skyrocketing oil prices as US President Donald Trump ratchets up tensions with Iran. Energy prices are surprisingly stable following the Trump-ordered assassination of Qasem Soleimani, but is unclear if this stability will last.

Japan’s economy is uniquely vulnerable to a surge in oil prices, particularly in the Middle East. Oil stands at the center of Japan’s energy mix, accounting for 76% of all sources.

And nearly 90% of Japan’s oil imports come from the Persian Gulf. This leaves Japan over a proverbial barrel should Middle Eastern hostilities escalate and unleash fresh energy-market chaos.

Energy has become an increasingly complicated topic for Japan. Since the 2011 Fukushima nuclear crisis, the majority of its 54 nuclear power plants have been idled. That has left Tokyo importing more and more coal, increasing its carbon footprint.

At present, coal accounts for 17% of the mix. The next largest source is hydroelectric at 4.4%, followed by liquified natural gas at 1.6%, renewables at 1% and nuclear at 0.6%. Japan, in other words, is about 94% dependent on fossil fuels.

That puts the country in a ticklish spot. No wonder organizers of the COP25 United Nations conference on climate change in Madrid last month rejected Abe’s request for a speaking spot.

Fossil fuel dependency makes Japan’s economy increasingly sensitive to oil spikes. The World Bank sees Japan growing 0.7% this year, which doesn’t leave much of a cushion should Trump intensify his trade war.

Odds are, he will amid anger over impeachment and election-year wrangling. What better way to change the headlines than slapping new taxes on China or auto imports?

Trump’s Iran gamble could be the start of an increasing bet on poking Persian Gulf powers to cheer his base, but that could go bad quickly. His calls for additional sanctions on Iran alone raise the possibility of confrontation.

Even without military action in the Gulf, Japan is vulnerable to energy-price swings for two reasons. One: They reduce demand both for businesses and households.

Two: the yen tends to rally sharply in times of global turmoil. This safe-haven dynamic would slam Japan’s biggest exporters and, ultimately, top-down growth.

Moreover, rising oil costs would generate “bad” inflation at a moment when the Bank of Japan is struggling to put growth on a stable, self-reinforcing path. Higher oil prices act like a stealth tax increase, denting the economy.

The costs would surge exponentially if a full-blown military clash occurred. Japan’s oil reserves, are a source of secret concern in Tokyo. As of October, total oil reserves were 515.64 million barrels. On paper, that’s supply enough to meet domestic demand for 234 days.

But recent inspections found that one-fifth of those stockpiled may be inaccessible in winter, causing alarm and chatter about an energy crunch.

The problem: tankers, thanks to rough winter seas, may have trouble reaching four of Japan’s 10 major storage facilities this year. The finding emerged from inspections following a June attack on a Japanese tanker near the Strait of Hormuz.

Regulations prohibit tankers to dock for loading when waves exceed 1.5 meters or when wind exceeds 15 meters per second. That could put sites in Akita, Fukui, Fukuoka and Nagasaki prefectures, housing in total about 18 million kiloliters of oil, largely off-limits.

The planned mission has got a hell of a lot riskier since the US assassinated Soleimani. Abe is a cagey politician, and at present, he claims the deployment is a go even as public opinion swings against.

Iran-US tensions are unwelcome developments given that Abe – ever the diplomatic pragmatist – has spent considerable energy wooing Iran.

Once Japan’s destroyer is in the Gulf, its mission will be explicitly separate from American interests. Even so, the vessel could well be caught in not just diplomatic, but actual military crossfire.

Asia Times / ABC Flash Point Oil Wars News 2020.

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