Oil Crisis Hits Japan: 600 Billion Monthly Fuel Subsidies to Exhaust Annual Reserves Within Three Months. Next Step to Endanger Global Liquidity?

TradingKey - According to Reuters citing Japanese government sources, Japan's fuel subsidies cost approximately 600 billion yen per month, and funding could be exhausted within three months. Previously, Japanese Prime Minister Sanae Takaichi has repeatedly sought to reassure the public on social media, but several analysts point out that the situation is already critical.

Sources disclosed that the Japanese government's funds and contingency reserves for fuel subsidies total 1 trillion yen; at a monthly burn rate of 600 billion yen, this can only be sustained for two months. Even including the contingency reserves in the 2026 budget, bringing the total to over 2 trillion yen, it would only last for three months.

2 Trillion in Subsidies + 79.8 Million Barrels of Crude: Japan Combats Oil Price Crisis

Previously, the Japanese government resumed price subsidies for oil refiners, capping the average retail gasoline price at 170 yen per liter by subsidizing the wholesale segment.

As early as March 11, the Japanese government preemptively announced a strategic petroleum reserve (SPR) release plan. On the 16th, it began releasing reserves capable of meeting 45 days of domestic demand, marking the largest release in Japan's history. IEA data shows that Japan plans to release a total of 79.8 million barrels, representing 20% of the total IEA release.

According to reports on April 5, the Japanese government is considering an additional release of national oil reserves in May, equivalent to approximately 20 days of Japan's usage.

Furthermore, the Japanese government is exploring alternative crude oil transportation routes to bypass the Strait of Hormuz and considering sourcing crude from regions outside the Middle East. Crude oil imports in May are projected to reach about 60% of the level from the same period last year, with the shortfall to be supplemented by releasing national oil reserves. However, this plan is still under discussion.

Japan is one of the world's major crude oil importers, relying on Middle Eastern countries like Saudi Arabia for approximately 94% of its supply. In March, Japan's crude oil imports stood at approximately 52 million barrels, the lowest level since 2013, and volumes are expected to decline further significantly from April onward.

Fuel Subsidies Heighten Fiscal Concerns: Is Global Liquidity at Risk?

However, the Japanese government's current subsidy policies have already sparked controversy. During a Diet session on April 6, LDP Member of the House of Councillors Masashi Adachi stated that given the potential for the situation to persist long-term, it is necessary to recognize that the era of importing large quantities of cheap oil from the Middle East has ended; as summer approaches and LNG prices also surge, electricity subsidies will further increase fiscal spending.

Adachi pointed out that using subsidies to suppress oil prices indefinitely is unsustainable and will lead to rising government bond yields, yen depreciation, and accelerating inflation.

Takeshi Minami, Chief Researcher at the Norinchukin Research Institute, stated that if crude oil prices continue to climb, government funds may be depleted faster than expected, and the Japanese government is likely to issue government bonds to bridge the funding gap, which would further exacerbate the depreciation of the yen.

Amid expectations that oil prices will drive up inflation and exacerbate domestic fiscal pressure in Japan, yields on Japanese government bonds (JGBs) have climbed repeatedly. On Monday (April 6), the 10-year JGB yield rose by 4 basis points (bps) to 2.424%, hitting a 27-year high.

Data shows that as some of the largest holders of Japanese bonds, domestic banks, life insurers, and pension institutions collectively hold approximately 390 trillion yen in Japanese debt; for every 1 percentage point increase in yield, it will theoretically result in tens of trillions of yen in valuation losses.

The upward trend in JGB yields not only affects domestic holders but could also trigger a global ripple effect. This is because Japan is one of the world's largest net holders of external assets, and its domestic institutions hold massive amounts of overseas assets. When JGBs plunge, these financial institutions may sell overseas assets and repatriate funds, thereby triggering a contraction in global market liquidity.