Japan to Raise Benchmark Gasoline Price by 5 Yen a Month as It Gradually Scales Back Subsidies

Key Facts

Japanese Prime Minister Sanae Takaichi said the government will raise the benchmark gasoline price by 5 yen per liter a month starting in December, on a path extending toward spring and aimed at gradually scaling back subsidies. Takaichi said the price adjustment takes oil prices and their impact on households and economic activity into account, amid Middle East disruptions. The government had been supporting refiners to keep the retail gasoline price near 170 yen per liter. The new path shifts part of the burden of higher energy costs to prices faced by households, while maintaining gradual monthly increases. The government has not specified when the subsidy program will end.

The announcement comes as energy import costs have risen and pressure has emerged in Japan’s trade balance. The trade deficit reached 2.81 trillion yen in the first half of the fiscal year, according to government data cited by the Associated Press. Imports rose 20.4% year on year to 66.3 trillion yen between April and September, a record, while exports and imports both reached record levels. In September alone, Japan posted a deficit of 536.6 billion yen, its fifth consecutive monthly deficit, compared with 1.1 trillion yen in August. The agency attributed higher oil import prices to the Iran war, while the government described Middle East disruptions as the context for its subsidy decision.

In energy markets, Brent crude rose from $70 a barrel in February to about $110 in October, according to the Associated Press, which cited analysts expecting prices to remain elevated in the near term. The front-month gasoline futures contract on the New York Mercantile Exchange settled at $3.0881 a gallon on October 29. That settlement is for a futures contract, not a retail pump price in Japan. This comes as the government moves to adjust the domestic benchmark price gradually instead of maintaining the subsidized level near 170 yen per liter. Trade figures indicate that higher import costs coincided with a wider deficit in the first half of the fiscal year.

Domestic demand indicators paint a mixed picture as debate over fuel prices begins. The consumer confidence index fell to 35.0 points in October from 35.4 points in September, below the market forecast of 35.1 points, according to Trading Economics data. By contrast, retail sales rose 2.3% year on year in September, compared with a 2.9% increase in August, according to the Trading Charts economic calendar. The slower pace of retail sales growth points to a deceleration in the annual comparison, while confidence declined from the previous month and came in below expectations. These readings put the effect of energy price changes on households in the broader context of consumption indicators, without determining the path of spending in the coming months on their own.

On the same day, the Bank of Japan held its short-term interest rate target at 1.25% in an 8-to-1 vote. Board member Hajime Takata dissented, calling for an increase to 1.5%. The bank raised its inflation forecasts and affirmed its readiness to continue increasing borrowing costs to counter growing inflation risks, Reuters reported. The decision pairs an unchanged rate with continued indications that an increase remains possible, while the vote reveals disagreement within the board over the appropriate next step. This comes as Japan faces higher energy import costs and declining consumer confidence.

The Bank of Japan will release minutes on November 5 from its monetary policy meetings held on September 17 and 18. Minutes from the October 29 and 30 meetings, at which the bank held rates steady, are scheduled for release on December 23, according to the bank’s calendar. The upcoming releases will provide access to the board’s deliberations at the previous meeting and then to the discussion accompanying the latest decision. The December release is directly tied to the meeting at which the vote was split 8 to 1. These releases coincide with the plan to raise the benchmark gasoline price, which begins in December and continues toward spring.