Japan’s Energy Stress Test Drives Coal Rally Amid Hormuz Closure

Japan’s Energy Security Under Pressure

Japan’s heavy dependence on imported energy is currently undergoing a real-time stress test. The crisis triggered by the war in Iran and the effective closure of the Strait of Hormuz has exposed structural vulnerabilities in one of the world’s largest energy importers.

Oil Reserves and Refining Capacity

With roughly 90% of its crude oil sourced from the Middle East, Tokyo has already moved to release around 80 million barrels from its strategic petroleum reserves – equivalent to roughly 26 days of domestic oil demand. This should be sufficient to stabilize the immediate fuel balance, particularly as Japan covers nearly 100% of its gasoline and around 95% of its diesel demand through domestic refining.

Yet the oil reserve drawdown addresses only part of the problem. The broader energy system – electricity and heat generation in particular – remains exposed to the ripple effects of the crisis.

LNG Imports and Australian Relations

Japan’s natural gas balance is no less dependent on imports. Around 98% of domestic gas demand is met by LNG imports, although overall consumption has been declining in recent years due to slower economic growth, the expansion of renewables, and the gradual restart of nuclear power.

In 2025 Japan imported 66.3 Mt of LNG, down 1.5% year-on-year, retaining its position as the world’s second-largest buyer after China. Roughly 6% of this supply transits the Strait of Hormuz (from Qatar and the UAE) while the majority comes from Australia (26 Mt), Malaysia (10 Mt), Russia (5.8 Mt, supported by Japan’s sanctions exemption for Sakhalin-II in which Mitsui and Mitsubishi hold a 22.5% stake), and the United States (4.5 Mt).

Australia remains Japan’s largest LNG supplier, but the relationship is now evolving under pressure. As Canberra faces acute shortages of refined fuels, the two countries have entered discussions on potential LNG-for-products swap arrangements, whereby Japan could supply gasoline and diesel in exchange for continued LNG flows.

At the same time, Tokyo has cautioned Australia against imposing a windfall tax on LNG exports – an option the Albanese government has been considering amid soaring commodity prices. Given the intensifying domestic fuel shortages in Australia, it appears increasingly likely that such populist taxation measures will be kept for less critical times in favour of preserving supply security and bilateral cooperation.

Coal Prices and Supply Shifts

The importance of gas to Tokyo is real. Within Japan’s energy mix, natural gas remains the dominant fuel, accounting for around 32% of power generation, followed by coal at 28%, nuclear at 9%, and oil-fired generation at 7%. However, gas-fired power’s share has been gradually declining as nuclear capacity returns and renewables expand.

This industrial component is now under pressure. Natural gas is a key input for hydrogen production in refining and petrochemical processes, but with crude and naphtha supplies tightening (around two-thirds of Japan’s naphtha imports previously passed through Hormuz, while the domestic refining system is skewed towards gasoline production) industrial activity is expected to slow.

In this context, the issue for Japan is less about physical gas availability and more about prices. The JKM benchmark has surged to around $20/MMBtu in recent days, up sharply from approximately $10.5/MMBtu prior to the conflict. At the same time, Australian FOB Newcastle coal prices have climbed from around $115/t at the end of February to approximately $135/t.

Japan’s coal supply is heavily concentrated in one country, Australia. In 2025, Australia accounted for roughly two-thirds of imports, supplying 100.6 Mt out of a total of 153.8 Mt. Indonesia followed with 25 Mt and Canada with 13.7 Mt.

While Japan continues to import significant volumes from Indonesia, it is likely to favour increasing purchases from Australia due to higher quality, outbidding other players in the Asian market, thanks to its greater financial capacity. This shift is very likely to come at the expense of smaller buyers such as Vietnam and Malaysia, effectively pricing them out of the Australian coal market over the upcoming months and pushing regional coal prices higher.

Nuclear Restart Strategy

A recently announced US-Japan energy deal adds a geopolitical dimension but is unlikely to shift market fundamentals. The agreement, lauded by Donald Trump in October 2025 as part of a broader bilateral trade framework, involves a multi-year $100 million supply deal for US thermal coal from Global Coal Sales Group to Tohoku Electric Power.

Volumes remain small (although not announced, the financial side of the deal points at around 1 Mt of coal spread across several years) relative to Japan’s 150 Mt annual imports, and US thermal coal generally offers lower calorific value than Australia’s Newcastle-grade supply. Not to mention the freight costs, substitution potential is limited, leaving Japan sensibly tied to Australian cargoes.

Coal may provide a short-term buffer, but Japan’s longer-term response is unlikely to hinge on a sustained increase in coal-fired generation. Despite the palpable political and social sensitivities following the Fukushima disaster in 2011, nuclear power remains central to Tokyo’s strategic energy outlook.

Tokyo Electric Power Company (TEPCO) has been working to restart the Kashiwazaki-Kariwa plant – the world’s largest nuclear facility, wielding a capacity of 8 GW. After 14 years of inactivity, trial power transmission began in February, with commercial operations initially targeted for late February. However, technical setbacks have delayed the process several times. Current output remains limited to around 20%, with transmission suspended, and TEPCO is now targeting April 16 for a full restart.

Therefore, Japan’s strategic trajectory points towards nuclear. The current crisis is reinforcing the country’s long-standing objective of reducing vulnerability to imported fuels by accelerating nuclear restarts and expanding domestic generation capacity.

Context

The Strait of Hormuz is a critical chokepoint for global energy trade, through which roughly 20% of the world's oil supply passes. The effective closure mentioned in this report stems from the ongoing war in Iran, creating immediate supply shocks for import-dependent nations like Japan and China. This geopolitical instability forces a re-evaluation of long-term energy security strategies, often accelerating shifts toward domestic alternatives or different supplier relationships.

Takeaway

Japan is pivoting back to coal as a short-term substitute while accelerating nuclear restarts to reduce reliance on Middle Eastern imports. This shift will tighten the Asia-Pacific coal market and increase Newcastle benchmark prices, disproportionately affecting financially vulnerable economies in the region.