Japan's energy crisis, triggered by the war in Iran and the closure of the Strait of Hormuz, has exposed the country's heavy reliance on imported energy. With 90% of its crude oil sourced from the Middle East, Japan has released 80 million barrels from its strategic petroleum reserves, but this only addresses part of the problem. The broader energy system, particularly electricity and heat generation, remains vulnerable to the crisis's ripple effects.
The country's natural gas balance is also heavily dependent on imports, with 98% of domestic demand met by LNG imports. However, overall consumption has been declining due to slower economic growth, the expansion of renewables, and the gradual restart of nuclear power. Despite this, Japan remains the world's second-largest LNG buyer after China.
The crisis has led to discussions between Japan and Australia on potential LNG-for-products swap arrangements, as Australia faces acute shortages of refined fuels. However, Japan has cautioned Australia against imposing a windfall tax on LNG exports, which could be kept for less critical times in favor of preserving supply security and bilateral cooperation.
Natural gas remains the dominant fuel in Japan's energy mix, accounting for around 32% of power generation, followed by coal at 28%, nuclear at 9%, and oil-fired generation at 7%. However, gas-fired power's share has been gradually declining as nuclear capacity returns and renewables expand.
The industrial component of gas demand is now under pressure, as natural gas is a key input for hydrogen production in refining and petrochemical processes. With crude and naphtha supplies tightening, industrial activity is expected to slow, which could partially offset the decline in Middle Eastern LNG imports.
In the context of the crisis, the issue for Japan is less about physical gas availability and more about prices. The JKM benchmark has surged to around $20/MMBtu, up sharply from approximately $10.5/MMBtu prior to the conflict. At the same time, Australian FOB Newcastle coal prices have climbed from around $115/t to approximately $135/t.
Japan's coal supply is heavily concentrated in Australia, which accounted for roughly two-thirds of imports in 2025. This shift is likely to come at the expense of smaller buyers such as Vietnam and Malaysia, effectively pricing them out of the Australian coal market. A recently announced US-Japan energy deal adds a geopolitical dimension but is unlikely to shift market fundamentals.
Despite the crisis, Japan's longer-term response is unlikely to hinge on a sustained increase in coal-fired generation. Nuclear power remains central to Tokyo's strategic energy outlook, with the Kashiwazaki-Kariwa plant, the world's largest nuclear facility, expected to supply electricity to the Tokyo metropolitan area. The current crisis is reinforcing Japan's long-standing objective of reducing vulnerability to imported fuels by accelerating nuclear restarts and expanding domestic generation capacity.
In the near term, Japan is likely to tighten availability in the Asia-Pacific coal market, reinforcing upward pressure on Newcastle benchmark prices. This shift will not go unnoticed for others, particularly Asia's more financially vulnerable economies.
