Saudi Arabia and Japan moving beyond energy trade

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Updated 02 May 2013

Saudi Arabia and Japan moving beyond energy trade

Saudi Arabia’s construction works and dynamic traffic reflect a busy market. “Of course, I’m delighted to see so many Japanese cars on the streets, despite the high prices of Japanese products — a result of the country’s difficult economic situation for almost 15 years,” says Professor Etsura Honda, economic adviser of Japanese Prime Minister Shinzo Abe.
“This stagnation and deflation have cost Japan loss of power in political and economic spheres,” Professor Honda told Arab News in an interview on the occasion of the premier’s 7-day visit to the Kingdom and the rest of the Gulf.
In January 2013, Prime Minister Abe — now in power for the second time — announced a risky and drastic plan to change the mindset of people in order to rescue Japan’s economy by depreciating the Yen.
Professor Honda explained why he believes that such radical economic changes could be the solution for Japan.

The following are excerpts from the interview:

Your trip goes from Russia to Ankara, via Jeddah, Abu Dhabi and Dubai. What do you hope to achieve?
Japan has been in almost 15 years of economic crisis. This resulted in having a stagnating economy, lack of inward investment and little consumer spending. As a solution, Japan’s new government developed the 2/2/2 plan to rescue our economy and we are currently asking friends to support us.

How can Saudi Arabia provide help?
We have long, stable and strong relations with Saudi Arabia. It is our main oil supplier, and in trade balance we rank number 3. After the natural disasters Japan faced — the earthquake, Fukoshima — our, energy and agricultural sectors among others have been badly affected. Among the many measures we are taking is lowering energy costs and prices. Also, we are looking to diversify energy sources from ASEAN countries and Russia. Since we are running short of energy, costs are running high and so alternatives are a must. Japan has a 5- to 10-year plan to develop methanhydrate — a form of crystallized undersea gas build. We shared this plan with our Saudi partners as a possibility for cooperation. If it’s realized, it could be a major source of income for Japan. Also, in their talks yesterday, Prime Minister Abe and Crown Prince Salman, Deputy Premier and Minister of Defense, agreed in their talks on increasing cooperation in unexplored fields such as agriculture and medical sectors.

Japan has a huge number of projects in Saudi Arabia — Sumitomo, Mitsui, Mitsubishi, Marubeni — with great revenues. Is the general public in Japan aware of the dimension and quality of these projects?
Saudi Arabia remains quite unknown to the general public in Japan. It is mostly known as an energy partner. We hope that after handling this economic crisis, more economic cooperation can be created. So far 400 students are studying in Japan. We know that Saudi Arabia has a young population that needs training therefore we would like to exceed this number to 20,000 for whom we hope that those who go back to the Kingdom can be our ambassadors and some may stay in Japan for research and training.

So what does this plan look like with which Japan’s economy will be rescued?
Well, the plan goes opposite the norm, in three steps. The yen is a very highly valued currency. This has led to — consumers not spending, enterprises not investing, and exports being expensive. These are all a result of wrong monetary policy. In January 2013, Prime Minister Abe decided that a change of mindset has to be created for the market to become vibrant again. The government and the Bank of Japan decided that the bank injects the market with money for indefinite period of time. This will lead to a (balanced) depreciation of yen leading consumers to spend, more inward investment and Japanese exports to be available for reasonable prices. Japanese products are expensive around the world so depreciation will help in making them affordable. Once the yen is depreciated, foreign currency market will be activated (through bonds selling) a mild inflation result and with it a change of mindset. In the last years none in Japan has been spending except the government in infrastructure, schools, etc. Everyone has been saving; we need to make people spend that money by making the yen less expensive so that they can “buy, spend invest.”

What are the triggers of this plan?
Once the value of the yen is deprecated, it will help Japanese exports. This is the first trigger. The second one is that share in the stock market will raise and affect cross-shares so balance sheets will improve, which is the third trigger.

Any signs of improvement?
Yes, since the announcement of this plan the yen has increased from 80 to 100. Yes, it sounds paradox but that’s what we need. Our plan is called 2/2/2; 2 percent inflation target, realized in 2 years and doubling our monetary base from 138 trillion yen to 270 trillion yen. Once hopefully our goals are achieved in two years’ time, we will have room to expand our international relations. We want to go beyond energy selling with Saudi Arabia, and hopefully explore manufacturing, medical and agriculture sectors. We also aim to be part of the peace process as an active member on the political scene. In his meeting with Prince Salman, the Japanese prime minister promised to facilitate a technical center between Jordan and Palestine to provide technical training for the youth.

Japan’s dispute with China over the Senkaku Islands has not been solved yet. Both sides claim sovereignty over those islands. Russian Prime Minister Putin gave a solution, which Japan maybe in favor of. How do you plan to solve this matter now?

All international documents prove that those islands belong to Japan. So we are confident about the verdict. Yes, Chinese political and economic power is increasing worldwide and not in favor of Japan’s interests. China’s focus in East Asia, includes Japan, Malaysia, the Philippines and Brunei. Japan is aware of its importance as a political and economic power in the region and is doing everything to ensure this. We strongly believe that a balance of power in the region is necessary for peace and rely on our allies to support us..

Around 120 businessmen accompany Premier Abe on this trip. This reflects great interest in the countries you have been visiting. What do you tell your audience?
Well, PM Abe gave a speech at King Abdulaziz University saying that Japan will be back on the international scene by empathizing economic strength, which have been our trademark. There have been so many governments in the last decades, with almost each year a new prime minister. With this government, this will hopefully change as it aims establishing trust and regain confidence through economical stability. Our businessmen are looking for investment opportunities in Saudi Arabia and vice-versa. Trade plays a very important factor as well. In addition, through our growth strategy portfolio and security investments will go up once our economy recovers. That is very attractive for any investors. The same goes for our other destinations.

Oil rises on million barrels OPEC pledge

Updated 2 min 32 sec ago

Oil rises on million barrels OPEC pledge

  • Oil prices rose almost 3 percent on Friday as OPEC agreed a modest increase in output to compensate for losses in production at a time of rising global demand.
  • The Organization of the Petroleum Exporting Countries agreed on Friday to boost output from July.

LONDON: Oil prices jumped yesterday afternoon as OPEC announced a more modest production increase than forecast.

The group said yesterday that it and its allies would from next month bring production back in line with levels originally agreed in late 2016, equivalent to an increase of around 1 million barrels.

But analysts have warned that the reaffirmed commitment — an effective production increase given that a number of producers have cut output more than agreed— would not be enough to lower prices, given further supply disruptions on the horizon.

OPEC Conference President and UAE Energy Minister Suhail Al-Mazrouei told reporters in Vienna that the target was a group-level commitment, and that individual production quotas for member states had not been set.

Adherence to the decision would be “challenging for those countries that are struggling with keeping their level of production,” he said, but he noted that other countries could pick up any shortfall.

“We will deal with it collectively,” he said, insisting that the group would not not exceed production agreements.

“It is difficult already to achieve that 100 percent,” he added. “No one intends to do anything beyond that.”

But Thomas Pugh, a commodities analyst with Capital Economics, said while OPEC currently had little spare capacity, production rebounds by key states might tempt members to over-produce.

“OPEC has found it difficult to police group quotas in the past so today’s decision runs the risk of production rising above its target,” he said.

“If production starts to rebound in Venezuela or Angola then the group may quickly exceed its quota.”

The lack of detail over individual commitments followed disagreements between Iran and Saudi Arabia about the level of increases ahead of the meeting, according to energy expert Cornelia Meyer.

“The ‘collective agreement’ to return to 100 percent compliance was in the end sufficiently fuzzy for them to get an agreement,” she told Arab News.

“But going forward the market is going to want to see more detail as to how it will be implemented — and by whom — before it impacts prices.”

Brent crude futures rose around 3 percent on the news, briefly exceeding $75 per barrel in early afternoon trading, with prices forecast to rise further in the short-term.

“The effective increase in output can easily be absorbed by the market and is not going to tip the oil balance into negative territory,” Harry Tchilinguirian, head of commodities strategy at BNP Paribas, told Reuters.

“I suspect the market will continue to grind higher, notably in view of oil inventories in the OECD being below the famous five-year average target and the ever present risk of supply outages in Venezuela and Libya.

The agreement is likely to do little to mollify those looking for higher output increases to ease pressure on prices, not least US President Donald Trump.

“Hope OPEC will increase output substantially. Need to keep prices down!” Trump tweeted yesterday, following the announcement of the agreement.

But Meyer noted that shifting macroeconomic trends — notably the prospect of growing trade wars between the US and trading partners like China and the EU — may see rising demand for oil slow or go into reverse.

“We’re out of the goldilocks scenario now,” she said.

“Both Saudi Arabia and Russia have talked up how much the market is short. From now on they may well have to talk it down in terms of that gap between supply and demand.”