Coal Is Back - and Japan Is Driving the Rally

Energy Security Tested by Global Flashpoints

Japan, a nation heavily reliant on foreign energy sources, is confronting a significant challenge to its supply stability. Escalating conflict in the Middle East and the potential strangulation of vital shipping lanes, specifically the Strait of Hormuz, have starkly illuminated the inherent vulnerabilities within one of the globe's largest energy importing economies. With an overwhelming 90% of its crude oil originating from the Middle East, Tokyo has swiftly tapped into its strategic petroleum reserves, releasing approximately 80 million barrels. This substantial draw represents about 26 days of the nation's domestic oil consumption, a move designed to cushion the immediate impact on fuel availability, particularly for refined products like gasoline and diesel, which Japan largely produces domestically.

However, this reserve depletion offers only a partial solution. The broader energy infrastructure, crucial for electricity and heating, remains susceptible to the wider ramifications of this geopolitical instability. Japan's reliance on imported liquefied natural gas (LNG) is equally pronounced, with nearly 98% of its gas needs met through international purchases. While overall LNG consumption has seen a modest decline in recent years, attributed to economic slowdowns, the growth of renewable energy sources, and the staggered recommissioning of nuclear power facilities, the fundamental dependence persists.

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In 2025, Japan imported 66.3 million tonnes of LNG, a slight decrease of 1.5% year-on-year, solidifying its position as the second-largest global importer after China. A small but significant portion, roughly 6% of this LNG supply, traverses the Strait of Hormuz, originating from Qatar and the United Arab Emirates. The bulk of imports, however, comes from Australia (26 million tonnes), Malaysia (10 million tonnes), Russia (5.8 million tonnes, with imports continuing under an exemption for the Sakhalin-II project where Japanese firms hold a stake), and the United States (4.5 million tonnes). Consequently, any disruption to Gulf-origin LNG shipments, while concerning, is considered physically manageable and unlikely to cause a drastic shift in Japan's overall energy supply.

Shifting Trade Dynamics and Price Pressures

The evolving energy landscape is fostering intricate negotiations, particularly with Australia, Japan's primary LNG provider. Faced with its own critical shortages of refined fuels, Australia is exploring potential LNG-for-products swap agreements. Under such arrangements, Japan could supply gasoline and diesel in return for a consistent flow of LNG. Simultaneously, Japan has voiced concerns to Canberra regarding the potential imposition of a windfall tax on LNG exports, a measure the Australian government has reportedly considered amidst soaring commodity prices. Given the acute domestic fuel scarcity in Australia, it seems probable that such populist fiscal policies might be deferred in favor of maintaining supply security and bilateral cooperation.

Natural gas plays a pivotal role in Japan's energy portfolio, accounting for approximately 32% of its power generation mix. Coal follows at 28%, nuclear at 9%, and oil at 7%. The share of gas in power generation has been on a downward trend, paralleling the return of nuclear capacity and the expansion of renewables. The demand structure for gas is heavily weighted towards the power sector, consuming between 55% and 65% of the total volume. However, a substantial segment, around a quarter, is utilized by industry, particularly in petrochemical and refining operations.

This industrial demand is now facing considerable pressure. Natural gas is a fundamental component in the production of hydrogen for refining and petrochemical processes. With tightening supplies of crude and naphtha – a significant portion of which previously transited the Strait of Hormuz, and Japan's refining capabilities geared towards gasoline production – industrial output is anticipated to contract. Energy suppliers are already flagging a probable near-term decline in industrial gas consumption, which could inadvertently help mitigate the impact of reduced LNG imports from the Middle East.

Coal's Resurgence and Nuclear's Strategic Future

The core issue for Japan, therefore, transcends mere physical availability of gas, centering instead on escalating prices. The Japan Korea Marker (JKM) for LNG has seen a dramatic surge, climbing to approximately $20 per million British thermal units (MMBtu), a sharp increase from around $10.5/MMBtu before the recent conflict. In parallel, Australian FOB Newcastle coal prices have risen from about $115 per tonne in late February to roughly $135 per tonne. Despite this upward movement, coal remains a more cost-effective option for power generation, solidifying its temporary role as a substitute fuel.

Japan's coal procurement is heavily concentrated in Australia, which supplied approximately two-thirds of its total imports in 2025, amounting to 100.6 million tonnes out of 153.8 million tonnes. Indonesia and Canada followed with 25 million tonnes and 13.7 million tonnes, respectively. Australian coal, valued for its higher calorific content and superior quality, commands a premium over Indonesian coal, which typically faces discounts in Asian markets. While Japan continues to source significant volumes from Indonesia, it is likely to prioritize increased purchases from Australia, leveraging its superior financial capacity to secure higher-quality cargoes and potentially outbid other regional buyers. This intensified competition could displace less financially robust buyers, such as Vietnam and Malaysia, from the Australian coal market, contributing to higher regional coal prices.

A recent energy pact between the US and Japan introduces a geopolitical element, though its impact on market fundamentals is expected to be marginal. The agreement, involving a multi-year, $100 million supply deal for US thermal coal to Tohoku Electric Power, represents relatively small volumes compared to Japan's annual import needs of around 150 million tonnes. Furthermore, US thermal coal generally possesses a lower calorific value than Australian Newcastle-grade supply, and factoring in freight costs, its substitution potential is limited. Japan's energy strategy remains intrinsically linked to Australian coal supplies.

While coal may offer a temporary reprieve, Japan's long-term energy strategy is firmly anchored in nuclear power. Despite the significant political and public sensitivities stemming from the 2011 Fukushima disaster, nuclear energy remains central to Tokyo's strategic energy outlook. The Kashiwazaki-Kariwa plant, the world's largest nuclear facility with an 8 GW capacity, is undergoing restarts by Tokyo Electric Power Company (TEPCO). Following 14 years of inactivity, trial power transmission commenced in February, with initial commercial operations targeted for late February, though technical hurdles have caused delays. Current operations are limited, with transmission suspended, and TEPCO is now aiming for a full restart by April 16. This facility is slated to supply power to the Tokyo metropolitan area, where approximately 70% of electricity generation currently relies on gas-fired plants.

Therefore, Japan's strategic direction clearly favors nuclear energy. The current supply crisis serves to reinforce the nation's long-standing objective of reducing its exposure to volatile imported fuels by expediting nuclear restarts and bolstering domestic generation capabilities. In this light, the ongoing disruption acts not only as a resilience test but also as a catalyst for fundamental structural change, providing a compelling narrative for proponents of nuclear energy in their discussions with skeptics.

Market Ripple Effects

The immediate consequence of Japan's potential shift towards greater spot-market coal purchases will be amplified upward pressure on benchmark prices like the Australian FOB Newcastle. This dynamic is poised to disproportionately affect Asia's more economically vulnerable nations. If Japan significantly increases its procurement of readily available coal, price increases are almost inevitable, creating substantial challenges for countries with tighter budgets and less bargaining power in the regional market. This situation highlights the interconnectedness of global energy markets and the significant influence that major consumers can exert, especially during periods of heightened geopolitical risk.