How Japanese businesses need to think about Ukraine and the energy shock
English original of column published today in Japanese in Nikkei Business
One of the most difficult decisions for businesses during the extraordinary period of shocks that the world has gone through during the past three years has been distinguish between phenomena that are temporary and those that need to be considered permanent. The war in Ukraine that was launched by Russia’s invasion on February 24th and has distorted energy markets and pricing hugely is a case in point. At first, many companies treated this impact as if it was likely to be temporary. Six months later, that no longer looks the right judgement.
In business terms, permanent does not need to mean eternal, but rather that the phenomenon is considered likely to endure for long enough to shape decisions about capital investment, business structures and other profound issues such as pricing. Temporary phenomena can be absorbed and adapted to without altering structures or pricing, or changing investment plans radically. Phenomena that seem destined to last for longer need to be responded to in more drastic ways.
The coronavirus pandemic has featured particularly great uncertainties because the key player has not been human beings or organisations, but rather a virus. Nevertheless, after the first few months, it became possible to understand the scale of the issue, and for many businesses government decisions rather than the virus itself became the most important issue to watch and predict.
The pandemic is not yet over, but in the two years since it began its effects have become easier for most businesses to absorb into their plans. In Japan, probably only hospitality businesses that are geared towards serving foreign tourists have remained so critically vulnerable to government decisions, although even they have been able to adapt in many ways.
With the Ukraine war and energy markets, the key determinants for business and the economy are again the decisions made by governments rather than any other sort of influence on either supply or demand. The difficulty now is that many of these decisions are being made on a military or strategic basis, not an economic or conventionally political one. This makes them harder to evaluate.
In the first few weeks and months of the war, a reasonable judgement was that the war would be disturbing and nasty but fairly shortlived. That was clearly the view of the war’s originator, President Vladimir Putin of Russia: he thought his opponents would collapse quickly under the pressure of an invasion by one of the world’s largest armies, and that democracies in Europe, North America and Japan, would likely resist Russia’s takeover with words rather than actions.
As a result, it seemed during March and April as if companies that were directly affected by the American-led financial sanctions regime might have to worry about the long-term consequences of such efforts to punish and isolate Russia, but that for other companies the impact would be temporary.
Now, as the northern hemisphere summer moves into autumn and towards winter, that judgement looks badly wrong. Just as politicians are bad at understanding business decisions, so it is equally hard for business executives to understand or predict political decisions. Nevertheless, executives have to take a view, especially if their businesses are strongly affected by the price of energy or imported grain.
Right now, the most prudent view to take on Russia and its war is that it is likely to go on for a long time, in one form or another. No one can be sure, including President Putin himself, but the right bet must be that it will still be going on and distorting markets one year from now, and quite possibly two years from now too.
This judgement makes good sense especially in the light of the pressures faced by Prime Minister Kishida and his government from China and from US-China relations. Thanks to that issue, which is so fundamental for Japan, there is no likelihood that the Kishida government will want to diverge in any meaningful way from the position on the Russian war taken by the US and the rest of the G7 countries.
The mid-term Congressional elections in the United States may have an important effect on President Joe Biden’s domestic political strength and policies. But there is much less likelihood of these elections altering the US’s foreign policy stance, for that is bipartisan in nature.
The quite bold announcement by the Kishida government that it wishes to see a new phase of investment in nuclear power plants in Japan is a recognition of the prospect that this Russia-led disturbance to energy markets needs to be seen as a long-term one. It also exploits that prospect. But if we combine Japan’s need to move more quickly to eliminate carbon emissions with the long-term nature of today’s war-driven energy shock, the decision becomes understandable.
We cannot know what the future holds. But businesses have to place their bets. Today, the right bet to place is that the war and its impact on energy and other markets is not just a transitory phenomenon. It will be with us for quite some time.