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Oil price worries seen nagging Japan at G7

Risks to the global economy from high oil costs will likely dominate Japan’s concerns at a meeting of industrial powers this weekend, but it may come under fire itself to do more to boost sputtering Japanese economic growth.
/ Source: Reuters

Risks to the global economy from high oil costs will likely dominate Japan’s concerns at a meeting of industrial powers this weekend, but it may come under fire itself to do more to boost sputtering Japanese economic growth.

While Japan’s relatively efficient use of energy makes it less vulnerable to oil shocks compared with other economies, its dependency on exports leaves any economic recovery hostage to possible slowdowns caused by higher oil costs in the United States or China.

Domestic firms have also slowly started to feel the heat from higher oil prices now that they are no longer cushioned by the soaring profits they saw last year to offset costs, analysts say. A weaker yen is also driving up import costs.

Japan is expected to join any call from Group of Seven (G7) finance ministers and central bank chiefs to help placate the impact of oil on the world economy.

“It will be meaningful to have the G7 express their worries over rising oil prices as a group, in a sign to keep oil producers and the market in check,” said Zembei Mizoguchi, Japan’s former vice finance minister for international affairs.

The G7, which comprises the United States, Japan, France, Germany, Italy, Britain and Canada, will meet in Washington alongside the spring gathering of the International Monetary Fund and World Bank on Saturday and Sunday.

Analysts said Japan could also encourage other industrialised economies to do more to conserve energy, although the absence of China -- the world’s biggest oil consumer after the United States -- may mean the debate will achieve little.

“Japan should be tempted to urge China, and to some extent, the U.S., to make more of an effort to use energy more efficiently and prevent an oil shock from spilling over to the rest of the global economy,” said Yasuo Goto, economist at Mitsubishi Research Institute. Japan depends almost entirely on imports for its oil, but consumes only half as much oil as the United States on a per capita basis and even less relative to the size of its economy.

Boosting growth
With its stalling economy, Japan could also find itself the target of criticism at the G7 gathering that it needs to do more to boost growth at home.

Japan’s economy grew a meagre 0.1 percent in real, price-adjusted terms in October-December from the preceding quarter, just narrowly escaping a third straight quarter of contraction.
Economic indicators since have been mixed, although the government and the central bank have maintained that Japan would resume a recovery later this year as global demand for its high-tech exports picks up.

A slowly improving jobs market, long clouded by companies’ efforts to cut labour and wages, could also be cited as a factor supporting the longer-term outlook.

“Structural changes, such as the improving labour market, are supporting the view that Japan will be able to sustain a recovery as personal consumption emerges as a new source of growth,” said Yukari Sato, senior economist at Credit Suisse First Boston.

Discussion at the G7 on currencies, which has kept Japanese officials on their toes in the past, should take a back seat this weekend as currency markets trade calmly.

Japan has not conducted yen-selling intervention since last March and with Chinese officials not expected to attend the meeting, talks on foreign exchange policies are expected to be limited, analysts said.