of coal was comparatively stagnant. Production of coal, however, decreased even in years of increasing coal consumption, because of coal importation. Japanese coal, mostly low-grade bítuminous, with a low heating value, was never adequate to meet the high-grade coking coal requirements of steel production.

4

More than any other major industrial country, Japan's economy expanded on the basis of imported energy. With approximately 80 percent of her petroleum coming from the Middle East, Japan's existence and development was fundamentally and totally threatened by the oil crisis beginning in 1973. Reexamination of her energy policy bared her dangerous vulnerability and need for increased self-sufficiency, diversification, and international cooperation. Because industrial use accounted for a large proportion of the total energy demand in Japan, fluctuations in the energy supply swayed domestic business activity, employment, and prices. For example, in 1973, a one dollar increase in the price of a barrel of crude oil resulted in a 5.1 percent increase in import cost and lowering of GNP (nominal) by 0.5 percent in Japan.5 As of 1978, a one dollar increase in a barrel of crude resulted in an increase of 2.4 percent in import cost and a lowering of GNP by 0.2 percent, while the comparative U.S. figures were 1.8 percent and 0.1 percent.

JAPAN'S RESPONSE TO "OIL CRISIS"

A stable economic foundation requires stability in energy sources. Yet there is little Japan can do domestically to enlarge potential petroleum reserves, other than to initiate exploration on the Northeast Asian continental shelf.

In 1973, MITI's first energy white paper declared:

* * * in order to guarantee Japan's oil supply it is necessary to encourage oil development overseas and on the continental shelf around Japan. Exploration and development of oil resources, through her own efforts is Japan's most effective means * * * of guaranteeing an independent, secure supply source.

MITI is now making long-range plans for the phase-out of all oil imports by 2030. As of mid-1977, "Japanese crude" accounted for less than 10 percent of imports, and MITI's goal to obtain 30 percent of Japan's crude oil imports from Japanese-owned companies or Japanese joint ventures with OPEC countries by 1985 appears overly optimistic.

Japan has redoubled her efforts to diversify her petroleum sources. The Government, working through the Japan Petroleum Development Corporation (JPDC), has been striving to increase alternative supplies, particularly from China, the Soviet Union, Indonesia and Mexico. Diversification of sources would lower Japan's reliance on politically volatile regions and would heighten her assurance of a stable supply of oil. Japan is investing more and more capital and technology in her foreign aid program to help secure oil from various regions. As opportunities arise, Japan is shifting some imports handled by Japanese trading companies to direct deals, and some contracts

4 Takeo Takahashi, “Oil and Japan's 'Energy-Weak' Economy", Look Japan, 25, No. 279, June 10, 1979, p. 6. 5 Japan and the Oil Problem, p. 21.

1979.

"Japan's Energy White Paper", Japan Petroleum Weekly, May 6, 1974, p. 18, and Nihon Keizai, August

with the majors to purchases from national oil companies. The Japanese plan of steel technology cooperation with Mexico, in hopes of procuring more Mexican crude oil, exemplifies the type of governmentto-government deal that Japan is increasingly seeking to obtain:

JAPAN REACHES ACCORD WITH MEXICO ON FINANCIAL AND TECHNOLOGICAL HELP IN EXCHANGE FOR OIL

The Japanese Government announced recently that it had agreed with Mexico on financial and technological cooperation for crude oil swap.

According to the agreement, Japan will extend a ¥30 billion loan for the planned expansion of Mexico's Las Truchas steel works and another ¥30 billion for the joint Japan-Mexico steel casting and forging plant and large diameter steel pipe mill construction.

Of the 30 billion for the joint projects, the Japanese Government will be offered by the Overseas Economic Cooperation Fund of Japan and two-thirds by Kobe Steel, Ltd. and Sumitomo Metal Industries, Ltd.

The Export-Import Bank of Japan will extend a low-interest bank loan of a little less than ¥20 billion for the joint projects.

In return for Japan's financial cooperation, the Mexican Government promised to triple its crude oil supply to Japan to 300,000 barrels a day, starting in 1982. Source: Nihon Keizai, July 1, 1980.

Finally, since 1973, petroleum importing countries have been stressing the need for international cooperation to ensure stable supplies. Japan originally was reticent to join other consumer countries in a common effort, for fear of antagonizing Arab oil exporters. Therefore, immediately following the 1973 oil embargo, there was a spate of Japanese missions to the Mideast oil-producing nations in search of "secure" supplies. Discouraging results prompted Japan to participate in the International Energy Agency (IEA) as a consumers' protective association.

THE ROLE OF COAL

In the post-1973 crisis era, coal did not originally reemerge as a prominent energy source. However, to increase reliance on primarily imported coal in the mid-1970's, the Japanese government began to provide loans for constructing coal-fired plants and financing overseas coal exploration. Japan is importing about 1 million tons of steam coal (primarily for power generation) a year. Coal now appears to be one of Japan's main hopes for the future-estimates are that the import volume will reach 22 million tons in 1985 and 80.5 million in

1995! 7

The United States, of course, could be a major supplier of Japan's future coal needs. Indeed, the Japanese are anticipating that some 30 percent of their coal will come from North America. Already, one major Japanese trading company has plans to import some 4 million tons per year of Alaskan Cook Inlet coal. While a great deal of American coal is not competitive at this time with Australian, Chinese, and Canadian sources, Japan-United States coal talks are underway to plan for future U.S. supplies. With fantastic coal resources, America is a logical supplier of large quantities of coal to the Japanese.

We believe it would help reduce Japan's energy and trading insecurities, if the United States negotiated a bilateral agreement ensuring access to certain minimum levels of supply similar to the agricultural agreements

'Nihon Keizai, March 4, 1980.

8 Nihon Keizai, November 13, 1979.

mentioned earlier. Such commitments would bring forth capital necessary for mine, rail and port expansions. We urge that the Administration give consideration to offering an energy security treaty.

ALTERNATIVE ENERGY SOURCES

The Japanese government realized the urgent need to promote and develop alternative energy sources after the oil shock. Yet only relatively modest goals were set: the government projects natural gas to supply 9 percent, geothermal power 0.3 percent 10 and nuclear power 5.4-7.4 percent of 1985 total consumption." Even these targets appear overly optimistic in light of accomplishments to date.

9

Prodded by the oil crisis, in 1974 MITI launched the Sunshine Project a research effort to develop new energy technology. Intended to secure solutions to basic energy problems and to harmonize energy utilization with environmental protection, the project has made headway in research and development on coal conversion and on solar, geothermal, and hydrogen energy. The Sunshine Project expects to provide more than 10 percent of Japan's energy supply from new sources in the year 2000 12

Japan recently has founded an organization for the comprehensive development of new energy which will conduct research involved in the promotion of petroleum-substituting energy development. Scheduled for establishment on October 1, 1980, the organization has three major

concerns:

1. Large-scale development of technology related to coal, geothermal, and solar energy;

2. Guarantees for the promotion of such developments, and

3. Extension of loans, obligation guarantees, etc. for the exploration and development of overseas coal.13

14

Energy conservation programs have also been periodically enacted since 1973. The 1985 target is energy conservation measures that effect a 10 percent saving. In March 1978, the Moonlight Program was established "to bring about efficient utilization of energy in areas such as energy conversion, transportation, and consumption both by industry and private areas".15 Attempting "to avoid any adverse effects on long-term economic growth and the people's living standards", the program focuses on energy conservation technology development. Thus far, research has progressed on such energy saving devices as the high efficiency gas turbine, magnetohydrodynamic (MHD) power generator, and the waste heat utilization technology system. And in terms of the economy of energy consumption in four major energy consuming sectors-industry, power generation, residential/business consumption, and transportation-Japan is number one in the world.17

The oil crisis proved unequivocally that massive long-term structural changes in Japan's energy-intensive industrial sector were a

Takahashi, "Oil and Japan's Economy", p. 6.

10 Working Group Demand and Supply Subcommittee for Energy in Japan, "Preliminary Forecast of Long-Range Energy Supply and Demand", June 6, 1977.

11 Takahashi, "Oil and Japan's Economy", p. 6.

12 Takahashi, "Oil and Japan's Economy," p. 16.

13 News from MITI, 2/29/80, p. 3.

14 "Japan and the Oil Problem", p. 31.

15 U.S. Joint Publications Research Service, "Moonlight Program Projects," October 1978, p. 18. 16 Ibid.

17 "Japan and the Oil Problem," pp. 14-18.

prerequisite for reducing dependence. MITI's objective is not to create an autarky, but to restructure the economy so that large energy-consuming industries which supported the "Japanese miracle" do not cause Japan's downfall. In the late 1970's, energy-intensive industries accounted for 33 percent of the total production from manufacturing industries, but accounted for 70 percent of the total energy consumption of those industries and 45 percent of the total investment in plants and equipment.18 Since 1973, Japan has slowly begun to stress development of service and technology-intensive industries. The tertiary or "services" sector has been providing most of the new job opportunities.19

INTERNATIONAL COOPERATION

International cooperation is an integral part of Japan's energy policy objective. To date, Japan has employed cooperative efforts with industralized countries with the most frequency and success. Negotiations with developing countries increasingly have been aimed at securing adequate supplies of vital resources through the use of foreign aid, rather than through research and development. "Development assistance for import" is directed towards natural resource development projects such as oil, natural gas, and coal.

The United States and Japan have major cooperative efforts under way in energy research and development. We initially signed a 5-year cooperative agreement in 1974, although no specific projects were negotiated under that agreement. Then in May 1979, an umbrella agreement for decade-long cooperation in several areas was reached. Initial emphasis is on nuclear fusion and coal conversion, with additional projects in such areas as solar energy conversion by means of photosynthesis and geothermal energy, high energy physics, and magneto-hydrodynamics (energy conservation through more efficient power generation).

The two largest projects are for nuclear fusion and coal liquefaction. Japan will contribute $70 million to the $140 million nuclear fusion project over five years, and a one-quarter share of the $1.51 billion coal liquefaction project. Japan's participation in the geothermal, solar, and high energy physics projects will range from $2 million to about $6 million for each annually. In all, the Japanese financial participation over the ten years of the umbrella agreement may approach $1 billion. The projects will be carried out in the U.S., although there will be an exchange of scientists.

According to both U.S. and Japanese officials, the umbrella agreement has stimulated cooperation in energy research and development, though some of the cooperative projects would have been carried out even without the agreement. The U.S. officials cited the following general benefits of the agreement: sharing expertise and ideas, pooling financial resources, more efficient and timely experiments, less duplication, and a more rapid dispersion of technology.20 Using the energy agreement as a model, the United States and Japan have just signed an agreement extending research and development cooperation into non-energy fields. The Carter-Ohira May 1, 1980 agreement provides for joint research in the following:

18 Takahashi, "Oil and Japan's Economy", p. 6.

19 "Implication of Japan's Emerging Service Economy", Keidanren Papers No. 8, 1980, p. 2. 20 GAO Report to Chairman Charles A. Vanik, March 28, 1980, ID-80-36.

Geodynamics-the study of Halley's comet, and the launching of a pace probe to Saturn;

Basic Research-neutron dispersion using sophisticated equipment; Health-research into recombinant DNA, drug and alcohol abuse and mental health; and

Agriculture-integrated control of tree diseases and insect pests, and the utilization of biomass.

United States-Japan trade issues cannot be divorced from Japan's economic vulnerability due to resource scarcity. True, long-term improvements to our trade problems must be found by focusing attention on the crucial energy situation. Although our joint research efforts are growing, their impact will be slight unless there are massive increases in investments of human and material resources for research and development by both nations. As the foremost candidate among industrialized nations to become a "Malthusian state," the more the Japanese economy expands by relying on a resource-scarce, commodityconscious world, the more intense her vulnerability will become.

Also, if energy supplier states experience severely destabilizing political turmoil. Japan's "moderate adjustment" energy policy would be devastated.21 Because time is a primary factor in shifting energy sources, especially when research and development is necessary, planning must begin a couple of decades in advance. Hence, more time should not be wasted-we urge a doubling and then tripling of United States-Japan cooperative energy research efforts as a way to moderate the long-term cycle of trade explosions. We also urge that research not be limited primarily to nuclear fusion and coal conversion. More research should occur in such areas as solar energy, ocean-wave-wind energy, and geothermal energy, which are sources requiring no imports and creating no vulnerabilities. Our two nations, the most technologically advanced in the world, can lead the way to the post-petroleum society and to freedom from the OPEC price yoke.

21 We note, however, the excellent job Japan has done in building a petroleum reserve of about 100 days worth of oil. Her success in this area further shames our own inadequate SPR efforts.