Natural gas and coal prices surge, Japan's electricity prices rise by 25%

Driven by the dual pressures of liquefied natural gas (LNG) prices soaring to a four-year high and steadily rising coal costs, Japanese electricity prices surged by more than 25% in a single week at the beginning of this week, significantly increasing energy import bills and highlighting the vulnerability of the Asian energy market amid geopolitical conflicts and supply-demand mismatches.

According to data cited by Bloomberg from the Japan Electric Power Exchange, the nationwide average electricity price on Monday rose more than 25% from the previous week, reaching $0.19 per kilowatt-hour (about 31.15 yen). This jump reflects the severe energy cost pressures faced by Japan as one of the world's largest LNG importers.

The spot price of LNG is the main driver behind this round of electricity price increases. The average spot price for Asian LNG delivered in December was reported at $29.30 per million British thermal units (MMBtu) at the end of last week, the highest since December 2022 and a sharp jump from $26.50/MMBtu the week before. Meanwhile, some power plants have scheduled maintenance ahead of winter, further constricting supply flexibility and increasing upward pressure on electricity prices.

LNG Prices Soar to 4-Year High, Strait of Hormuz Becomes a Key Bottleneck

The sharp rise in Asian LNG prices is closely linked to ongoing geopolitical tensions in the Middle East. The number of LNG carriers able to safely navigate the Strait of Hormuz is extremely limited; combined with intensified competition from European buyers preparing for the winter heating season, this has pushed Asian LNG spot prices to their highest level in nearly four years.

Japan had previously attempted during the summer to substitute natural gas with coal-fired power to avoid high LNG costs. However, the room for this strategy is narrowing—the persistently high LNG prices have kept Japan's gas-fired power generation costs at their most expensive in years, while reducing the potential for further energy structure adjustments.

Switch to Coal Fails to Ease Crisis as Coal Prices Also Climb

Japan is not alone. Since the outbreak of Middle Eastern conflicts, many Asian countries have been accelerating the switch from natural gas to coal based on considerations of cost and supply availability. However, this collective shift is now feeding back into the coal market itself.

The concentrated release of Asian demand coincides with shrinking supply from Indonesia, the world's largest exporter of thermal coal, jointly driving coal prices significantly higher. The global coal price benchmark—Newcastle futures—has surged about 30% from levels prior to the Middle East conflict. This means that Japan's strategy of burning more coal to hedge against LNG costs is being undermined by the rise in coal prices.

Import Bills Balloon, Energy Cost Pressure Spreads Downstream

The broad rise in energy prices is significantly increasing Japan's overall import costs. Ongoing increases in oil prices have led to a substantial rise in Japan's oil and LNG import expenditures, and for this economy highly dependent on fossil fuel imports, a growing energy trade deficit will continue to drag on the macroeconomy.

The rapid rise in electricity prices will directly increase industrial production costs and household expenses, and will push inflation upwards through cost transmission mechanisms. With the Bank of Japan closely monitoring inflation trends, persistently high energy prices undoubtedly add further complexity to policy decisions.