How Oil Prices Impact the Japanese Economy: Evidence from the stock market

Oil is Japan’s largest energy source, with 39% of its total energy supply coming from oil in 2022. Dubai crude oil spot prices increased logarithmically by 120% between April 2020 and June 2024 (see Figure 1). How has this surge in petroleum costs affected Japanese firms?

Fernald and Trehan (2005) noted that, unlike for domestically produced oil, an increase in prices for imported oil shifts income from domestic users to foreign oil producers. They thus argued that price increases for imported oil act like a tax on domestic users. Golub (1983) similarly observed that oil price increases transfer wealth from oil importing countries such as Japan to oil exporters.

The Japanese government took action to offset the burden of high energy prices on Japanese actors. Starting in 2022 it provided subsidies to oil wholesalers in order to lower gasoline and fuel prices to final users. It also provided subsidies to reduce electricity and gas bills. By August 2023 it had spent 6.3 trillion yen on fuel subsidies (Kishida, 2023). Kishida acknowledged that these subsidies encourage fossil fuel consumption and work against decarbonization. The fiscal costs are also burdensome given Japan’s large public debt.

Blanket subsidies do not address the fact that some sectors gain from oil price increases. This paper examines what sectors gain and lose from higher oil prices. It does this by investigating how oil price increases affect Japanese sectoral stock returns. Finance theory indicates that stock prices equal the expected present value of future cash flows. The impact of oil price changes on stock prices should thus shed light on how they will impact firms in that sector.

The evidence indicates that oil price increases driven by global aggregate demand shocks benefit Japanese sectors that compete in world markets such as machinery, electronic components, and consumer electronics. The increase in aggregate demand raises demand for goods produced by these sectors. Aggregate demand-driven oil price increases harm sectors oriented towards the domestic market such as railroads, hotels, restaurants, and delivery services. Oil price increases driven by oil supply factors benefit several Japanese industrial firms. This may reflect Fukunaga et al.’s (2010) findings that Japanese firms provide crucial products that agents demand when oil prices increase. Oil price increases driven by oil supply shocks harm sectors such as construction and tires that depend on oil and energy.

These findings indicate that many Japanese sectors and firms benefit from oil price increases. One policy implication that follows from this is that, if the Japanese government wants to alleviate the burden of higher oil prices, it should avoid universal subsidies. To promote decarbonization and preserve fiscal space, it should target subsidies only towards those sectors and individuals that suffer from oil price hikes.

Source: Federal Reserve Bank of St. Louis FRED Database.