Japan’s Iran Sanctions Dilemma

Cutting off Iranian oil imports has put Tokyo in a difficult position. The United States and its European allies have already agreed to up the ante on sanctions against Iran, but the domestic costs that Japan has to bear in order to cooperate are higher.

Prime Minister Yoshihiko Noda’s government has indicated its desire to cooperate, and last December the Ministry of Foreign Affairs announced new restrictions on the operations of 106 entities as well as one individual with potential links to proliferation-sensitive activities in Iran. But the real effort now is to reduce Japan’s oil imports from Tehran, and to negotiate an exemption from more stringent restrictions on Japanese banks included in the new U.S. sanctions law.

Rebalancing Japan’s energy supply is even more delicate at the moment, as most of the nations’ nuclear power plants remain offline. Efforts to compensate by increasing access to overseas sources of supply, including oil and LNG imports, have ensured Japan’s national power supply since the disasters of March 11 last year. The Institute of Energy Economics, Japan estimated an additional twenty-nine million kiloliters of demand for crude and heavy oil since 2010, and an added cost of 3.3 trillion yen, or $43.2 billion, for imports of fossil fuel for thermal plants. Thus, suddenly imposing more severe oil import restrictions would be difficult and expensive at a time when the economy is fragile.

Japan has been decreasing its reliance on Iranian oil steadily since the 2006 sanctions took effect. Since 2007, Japan has reduced its imports from Tehran by roughly 40 percent, according to the Ministry of Economy, Trade and Industry. Roughly 500 barrels per day of Iranian crude oil imports have dwindled to 316 barrels per day over this period. That works out to be an 11 percent annual rate of reduction, which by 2010 had brought Japan down to the third largest importer from Iran after the European Union and China. In contrast, South Korea’s crude oil imports from Iran increased by 20 percent in 2011, and China’s imports rose by 30 percent.

Tokyo now must accelerate this rate of reduction to satisfy U.S. legal requirements and the rising political interest of the U.S. Congress. Japan has already promised to do so, but what remains to be negotiated is the speed of those reductions. Officials from the Japanese government are expected to visit Washington, DC, on Thursday to discuss how much faster Japan must cut its imports.

Part of that answer depends on alternate suppliers. Japan has already diversified its sources considerably. In 2010, Iran accounted for only 9.6 percent of Japan’s oil imports, with Saudi Arabia (28.8 percent), the UAE (20.4 percent), and Qatar (11.8 percent) taking a leading role as Japan’s crude oil suppliers. The continued cooperation of alternative crude oil suppliers, of course, will be critical to sustaining Tokyo’s ability to meet its energy needs and find alternative source of supply. Foreign Minister Koichiro Gemba’s visit to the region from January 5 to 12 demonstrates how keenly Tokyo depends on their willingness to continue upping their production.

Two additional challenges are also in the mix for Tokyo. The first is the financing of oil imports from Iran. Annually, Japan’s oil trade with Iran runs around one trillion yen, or $13.1 billion. On January 19 the Nikkei Shimbun reported that 80 to 90 percent of those transactions are done by the Bank of Tokyo Mitsubishi UFJ, and the remainder by the Sumitomo Mitsui Banking Corporation. An exemption of Japan’s banks from immediate affect of the new sanctions law, therefore, would allow Tokyo to manage the risk involved for two leading financial institutions as it moves forward in reducing its Iranian oil imports.

Beyond these specific calculations on the new sanctions, the deeper challenge for Japanese policymakers is the domestic politics of the sanctions debate itself. The growing perception in Japan is that cooperation in the sanctions effort against Iran only benefits other economic competitors, most notably China. In 2006, the Japanese government at the urging of the Bush administration ended its petroleum development project at Azadegan, seen to be one of the most promising untapped oil fields in Iran. Almost immediately thereafter the Chinese government concluded a deal with Tehran to take over the development project, ensuring that Beijing would have preferential access to the long-term oil stream that would result.

Today too most Japanese watch Chinese efforts to ensure its oil supply in Iran as well as efforts to negotiate preferential treatment from other alternative suppliers, and see direct competition to Japanese interests. Chinese premier Wen Jiabao’s visit to the capitals of Saudi Arabia and the UAE on the heels of Foreign Minister Gemba upped the ante, and resulted in a deal with Saudi Arabia for development access to the Manifa oil field. Within Japan, while the government does its best to cooperate with Washington on the most recent round of sanctions, critics charge that China seems to be—yet again—eating into Japan’s energy supply streams (at much lower cost, by the way) and getting immediate gains from Japan’s decisions. It doesn’t help that South Korea remains cautious about cutting its imports from Iran, and that India has flat out refused to curtail its Iranian oil purchases. South Korean president Lee Myung-bak’s upcoming trip to Saudi Arabia and the UAE reveals the heated competition for crude oil among Asia’s leading economies.

Over the last several years, Tokyo has become one of Washington’s closest allies in the effort to gain international support for the sanctioning of Iran’s nuclear program, both through the United Nations and now with the United States and the EU. Yet we should remember that Japan has much at stake, especially this year. Ensuring that Tokyo can manage a reduction in its imports is one important piece of the puzzle. Allowing a graceful exit for its banks, already significantly engaged in cooperating with existing sanctions and major financial partners in the U.S. domestic market, is an important step in ensuring continued Japanese cooperation over time. At all costs, U.S. policymakers must ensure that Tokyo’s cooperation in nuclear nonproliferation efforts in Iran does not exact a higher economic or political cost than Beijing, Seoul, or Delhi’s lack of cooperation.