The Effect of Oil Price Fluctuations on the Japanese Economy: Evidence from the stock market

Willem THORBECKE
Senior Fellow, RIETI

According to the International Energy Agency, 51 percent of Japan's final energy consumption in 2016 came from oil and oil products. All but 0.2 percent of Japan's oil came from imports rather than domestic production. Japan's leading import category between 2009 and 2016 was crude oil. The value of oil imports over this period equaled 815 billion U.S. dollars. Oil thus plays a vital role in the Japanese economy.

How do volatile oil prices affect Japanese industries?

As Figure 1 shows, oil prices have been very volatile. How do these oil price changes affect Japanese industries? One way to investigate this question is to investigate how oil price changes affect Japanese equity prices. As Black (1987, pp. 113) observed, "The sector-by-sector behavior of stocks is useful in predicting sector-by-sector changes in output, profits, or investment. When stocks in a given sector go up, more often than not that sector will show a rise in sales, earnings, and outlays for plant and equipment."

To examine this question Thorbecke (2018) regressed the monthly change in industry stock returns on the change in the log of the spot price for West Texas Intermediate crude oil, the CPI-deflated real effective exchange rate, the return on Japan's aggregate stock market, and the return on the U.S. stock market. Table 1 reports the coefficients on the change in the log of WTI Crude that are statistically significant at at least the 10 percent level.

The industries most exposed to oil price increases are electricity and other utilities. A one standard deviation increase in oil prices, equal to 0.0965, would lower the return on electricity stocks by 1.4 percent (equal to 0.0965 times 0.145) and on construction electricity stocks by 1.38 percent. A one standard deviation shock would also reduce airlines stocks by 1.1 percent and trucking stocks by 0.8 percent (Note 1).

Many other industries such as heavy construction, home construction, food, beverage, and retail are harmed by oil price increases. This reflects the effect of higher oil prices on producing and transporting these goods and on the ability of consumers to spend on these items. For instance, higher oil prices impede construction by raising the costs of electricity, transporting materials, and using construction machinery. In addition, property and casualty insurance is also harmed by an increase in oil prices, perhaps reflecting the impact of oil prices on maritime shipping rates and on the volume of shipping.

The oil and gas production and exploration sectors benefit from oil price increases. A one standard deviation positive oil price shock raises returns to oil and gas stocks by 1.5 percent. The commercial vehicle sector also gains from higher oil prices because of higher demand for public transportation such as buses when fuel prices rise. The auto parts sector benefits as there is more demand for auto parts that increase fuel efficiency when oil prices increase. Nonferrous metal stocks such as gold and silver mining companies gain because oil prices increases raise inflation, and gold and silver mining stocks provide a good hedge against inflation. Many other Japanese industrial groups gain from higher oil prices because they provide inputs for industries that that benefit from oil price increases. Petrochemical companies (a subset of the industrial suppliers sector) also gains from higher oil prices.

In total, 33 percent of the sectors investigated are affected, either positively or negatively, by oil price changes. Since oil prices have been so volatile, oil price changes create a lot of uncertainty for Japanese companies. Bloom (2009) and other found that increased uncertainty reduces investment and economic growth.

Policy implications

Diversifying out of fossil fuels into renewable energy sources and adopting energy-saving technologies could help to reduce this uncertainty. Government funding for research and development on decarbonization could facilitate this transformation.

The results also indicate that oil prices impact the food industry. Taghizadeh-Hesary, Rasoulinezhad, and Yoshino (2018) noted that oil is used to run tractors and machinery, to manufacture fertilizers, to heat greenhouses, to raise livestock, and to transport and distribute food. Taghizadeh-Hesary et al. recommended using renewable energies to take the place of some of the fossil fuels employed in food production. The government could help this to happen by providing subsidies for research, development, and investment, by establishing pilot facilities, and by increasing consumer awareness.

Figure 1. Price of West Texas Intermediate Crude Oil per Barrel
Figure 1. Price of West Texas Intermediate Crude Oil per Barrel
Source: Datastream Database
Table 1. The Exposure of Japanese Industry Stock
Returns to Oil Prices
Asset Beta to WTI Crude Oil Price
Electricity -0.145***
(0.032)
Construction Electricity -0.143***
(0.031)
Utilities -0.141***
(0.030)
Gas Distributors -0.132***
(0.034)
Gas, Water, and Multi-Utilities -0.132***
(0.034)
Airlines -0.112***
(0.041)
Apparel Retail -0.108**
(0.044)
Broadcast and Entertainment -0.105**
(0.045)
Travel and Tourism -0.087***
(0.020)
Trucking -0.081***
(0.024)
Retail -0.069**
(0.021)
General Retailers -0.069***
(0.020)
Broadline Retail -0.066***
(0.023)
Heavy Construction -0.066***
(0.027)
Transport Services -0.059**
(0.030)
Restaurants and Bars -0.057*
(0.031)
Food Producers -0.057**
(0.026)
Food Products -0.057**
(0.026)
Soft Drinks -0.057*
(0.031)
Home Construction -0.055**
(0.025)
Property/Casualty Insurance -0.054*
(0.030)
Nonlife Insurance -0.053*
(0.030)
Consumer Services -0.052***
(0.011)
Delivery Services -0.052*
(0.032)
Business Supplies and Services -0.050*
(0.029)
Food and Beverages -0.048**
(0.023)
Consumer Staples -0.042**
(0.020)
Personal Products -0.042*
(0.022)
Travel and Leisure -0.041*
(0.025)
Pharmaceuticals and Biotechnology -0.039**
(0.020)
Health Care -0.039**
(0.019)
Pharmaceuticals -0.039**
(0.020)
Electronic and Electrical Equipment 0.023*
(0.013)
Industrials 0.032***
(0.012)
Industrial Goods and Services 0.034**
(0.014)
Leisure Goods 0.041*
(0.022)
Electrical Components and Equipment 0.044***
(0.015)
Auto Parts 0.048**
(0.024)
Industrial Engineering 0.052**
(0.021)
Computer Services 0.066*
(0.037)
Diversified Industrials 0.066*
(0.037)
Computer Hardware 0.068**
(0.031)
Commercial Vehicles and Trucks 0.101***
(0.027)
Integrated Oil and Gas 0.110***
(0.037)
Nonferrous Metals 0.114***
(0.031)
Industrial Suppliers 0.142***
(0.035)
Oil and Gas Production 0.145***
(0.044)
Oil and Gas 0.148***
(0.043)
Oil and Gas Exploration and Production 0.156***
(0.043)
Note: The table reports the coefficient on the change in the log of the spot price for West Texas Intermediate (WTI) crude oil in a regression of monthly industry stock returns on the change in the log of the spot price for WTI crude oil, the CPI-deflated real effective exchange rate, the return on Japan's aggregate stock market, and the return on the U.S. stock market. HAC standard errors are in parentheses.
Source: Datastream database, CEIC Database, and calculations by the author.
*** denotes significance at the 1% (5%) [10%] levels.
Footnote(s)
  1. ^ Electricity generation recently has been powered more by natural gas, coal, and other fuels than by oil. To investigate whether the earlier part of the sample period is driving the results I ran rolling regressions. I found that oil prices continue to influence electricity stocks even after the 2008-2009 Global Financial Crisis. I also investigated whether oil prices matter in the regression because they are correlated with natural gas prices. I found that, even controlling for natural gas prices, oil price rises still decrease returns on electricity stocks.
Reference(s)
  • Black, F. (1987). Business Cycles and Equilibrium, Basil Blackwell, New York.
  • Bloom, N. (2009). The Impact of Uncertainty Shocks. Econometrica 77(3), 623-685.
  • Taghizadeh-Hesary, F, Rasoulinezhad, E. and Yoshino, N. (2018). Volatility Linkages Between Energy and Food Prices: Case of Selective Asian Countries. Paper presented at the ADBI/ASEAN Secretariat Workshop on Volatility of Energy Prices and Economic Performances, Jakarta, 1 August.
  • Thorbecke, W. (2018). The Impact of Oil Prices on East and Southeast Asian Economies: Evidence from financial markets. RIETI DP 18-E-043, July.

December 10, 2018