The Japanese Prime Minister’s trip to Iran, where he met with Ayatollah Ali Khamenei and President Hassan Rouhani to intermediate in the U.S.-Iranian crisis, may have inadvertently contributed to stirring up a hornet’s nest – and laid bare how limited Japan’s tools are to ensure the stability of its most important energy source. While Shinzo Abe was on the ground in Tehran, a Japanese-owned vessel was attacked in the Gulf of Oman, while on the same day a Norwegian-owned vessel was struck and damaged outside the strategically important Strait of Hormuz. This followed attacks on four vessels in early May that were docked at a port in the United Arab Emirates.
Tensions between the United States and Iran have only intensified since then. A week after Abe’s visit to Tehran, a U.S. surveillance drone was brought down by a ground-to-air missile attack by the Iranian Revolutionary Guard Command (IRGC), significantly intensifying the crisis in the Gulf. U.S. Senator Tom Cotton (a Republican from Arkansas) referred to these attacks as escalatory and called for retaliatory strikes against Iran, but President Trump apparently called off a planned attack on key Iranian missile and radar facilities, citing the possibility of a disproportionate loss of Iranian lives.
Trump instead announced further economic sanctions, which rather than defusing the crisis appear to have undermined both Japan’s diplomatic efforts and those of other countries seeking to mediate a solution. The new sanctions are targeted against Supreme Leader Ali Khamenei, Foreign Minister Javad Zarif and eight senior IRGC figures. Zarif in particular played a crucial role in the negotiation of the 2015 Iran nuclear agreement (JCPOA) and visited Japan in mid-May to meet with Prime Minister Abe and Foreign Minister Taro Kono. German and British diplomats, as members of the P5+1 group that negotiated the original nuclear agreement, are seeking to defuse the escalating tensions in the region, while the Iranians refer to these latest U.S. sanctions – thought to be seriously damaging the Iranian economy – as “economic terrorism.”
New U.S. sanctions appear to have undermined Japanese diplomatic efforts
It should be no surprise that Japan is so keenly interested in resolving the tensions in the Persian Gulf. Japan has the lowest energy self-sufficiency of all G7 countries, with its external energy dependency deepening significantly after the nuclear accident in Fukushima in 2011 forced the closure of many of its nuclear power plants. The country relies heavily on the Persian Gulf for its oil and liquefied natural gas (LNG) supplies – around 80 percent of Japan’s oil comes from the Gulf and it is particularly reliant on Saudi Arabia and the UAE for its supplies. Almost one fifth of Japan’s LNG, meanwhile, comes through the Strait of Hormuz, much of it from Qatar – part of the full half of Japan’s LNG needs that are supplied through strategic passageways in the Indo-Pacific region. Japan is an especially heavy investor in the Middle East, including in Iran, with significant investments both in upstream oil and gas development and in the petrochemicals industry.
Japanese officials are keenly interested in ensuring stable and predictable prices for the energy commodities on which the world’s third largest economy is so reliant. Hence, Japan is crucially interested in maintaining the smooth global supply of oil and gas, as well as freedom of navigation for the commercial vessels that transport oil and gas from the Persian Gulf to Japan. However, global oil prices have risen by almost 10 percent – or over $5 per barrel of oil – since the Prime Minister’s visit to Iran. Insurance rates for ships transiting the Gulf have also dramatically increased in recent weeks, following the attacks on the six commercial vessels. The Wall Street Journal recently reported that war risk insurance for a single cargo transiting the Persian Gulf may now be as high as $500,000.
To further complicate Abe’s situation, question marks are also now being raised about whose responsibility it is to provide security for the commercial vessels that transit the Gulf. As the United States has dramatically reduced its reliance on Gulf oil and gas due to historically high domestic oil and gas production, President Trump and the national security establishment in Washington may demand that other countries step up to provide the security and naval escorts that may now be needed to protect commercial sea traffic in the region.
Japan’s constitution makes it difficult to determine exactly who is responsible to protect its commercial sea lanes
For Japan, that demand presents significant difficulties. While the Indian Navy has opted to provide armed escorts for Indian-flagged vessels in the Persian Gulf and the Gulf of Oman, the activation of the Japan’s collective self-defense condition, the constitutional interpretation of which was changed five years ago, can only be met when Japan’s “survival” is threatened. In general, a certain set of conditions must be met: Japanese citizen’s lives must be endangered and Japanese citizens’ freedoms or right to pursue happiness must be totally undermined. Following the June 13th attack on the Japanese vessel, Japan’s Minister of Defense, Takeshi Iwaya, decided that Japan did not need to dispatch SDF personnel or naval resources to the Persian Gulf as he deemed that the incident did not meet these conditions for collective defense. None of the crew of the Kokuka Courageous, the vessel that was struck in June 13th, were Japanese, and none were injured during the evacuation.
It is unlikely that Japan’s constitutional constraints mean much to Trump: Bloomberg reported that the president may have had discussions with his national security team about the continuing need for the post-war U.S.-Japan security alliance. Any reinterpretation of the U.S.-Japan security obligations that has been so central to Japan’s post-war development is likely to cause alarm both in Tokyo and among other security treaty countries in Asia. However, the quid pro quo for any reduction in U.S. security obligations may be a reassessment of the role of the dollar as the world’s leading reserve currency. Japan and other holders of US treasury bonds might reconsider their need to continue these investments if the United States significantly reduces its military commitments in the Western Pacific. There may also be increased pressure to denominate contracts for oil in currencies other than US dollars, thus reducing the power of the dollar as the world’s leading reserve currency.
World markets have not overlooked the potential significance of Trump’s musings. The stock prices of many Japanese defense companies rose markedly on the Tokyo Stock Exchange on June 25 because of Bloomberg’s report, anticipating an increased need for Japan to provide for its own defense. These included premier defense companies such as IHI, MHI, Hoya, and Hosoya, while Ishikawa Seisakusho, which makes a wide variety of defense equipment, was up 17 percent in the morning trading session following the attack on the vessel.
Abe may now be more circumspect about possible progress in view of the deteriorating security environment in the Gulf
Given Japan’s energy dependence on the Persian Gulf there is little doubt that Prime Minister Abe will have continued his mediation efforts during the G20 in Osaka on June 27 and 28. Many of the main protagonists in the Middle East crisis were present: the United States, United Nations, Saudi Arabia, Turkey, China, Russia, India, and all of the EU countries that were signatories to the JCPOA. Japan will also hand the chair of the G20 to Saudi Arabia next year.
Yet Abe may now tread more carefully and be more circumspect about possible progress in view of the deterioration in the security environment in the Gulf during and after his recent visit to Iran. With the crisis continuing to unfold and with critical deadlines approaching almost weekly, there will be no shortage of opportunities for Abe to display his skills as a mediator. Yet there is also no shortage of opportunities to show just how much of the unfolding crisis is out of Japan’s control.
Tom O’Sullivan is the founder of Mathyos Advisory an energy and defense consultancy based in Tokyo, and lectures in business at Saitama University