Despite government assurances that Japan is insulated from the direct impacts of a Strait of Hormuz closure, Tokyo remains painfully exposed to LNG price fluctuations.

As it stands, Japan’s LNG import bill is poised to surge, mirroring the jump experienced after Russia’s invasion of Ukraine. Between 2021 and 2022, the value of LNG imports rose by 65% in US dollar terms, and 98% in yen, despite a 3% decline in volumes, the Institute for Energy Economics and Financial Analysis (IEEFA) says.

In Japan, rising LNG costs are expected to feed through to wholesale power markets and retail tariffs. Utilities are planning to increase charges, with household electricity bills projected to rise by JPY15,000 ($94) from April, and an extended closure of the Strait of Hormuz could also serve to stoke inflation and reduce GDP by up to 3% in 2026.

As a result, policymakers in Japan are being advised to prioritise renewable energy and provide clear guidance for utilities to make substantial domestic renewable commitments, IEEFA adds.

Attempting to counter these realities is the government of Prime Minister Sanae Takaichi, which has argued in recent weeks that Japan is in fact shielded because only 6% of LNG imports actually transit the Strait, and Tokyo holds three weeks of domestic inventory. This claim is overly optimistic, however, as it overlooks indirect risks.

Japan is already facing heightened LNG spot price volatility, which will drive overall import costs higher. Rising fuel prices are already translating into electricity hikes at a time when households and businesses are now having to contend with inflation. And to date, attempts by authorities to curb these increases only look like they are set to exacerbate fiscal and macroeconomic pressures.

Claims of being shielded are one thing, but the undeniable issue is that the severity of these risks depends almost entirely on the duration of the Strait closure.

LNG price exposure VS diversification

At present, IEEFA reports that LNG provides over 30% of Japan’s power generation and that diversification is central to Japan’s procurement strategy, with utilities sourcing LNG from geographically diverse suppliers. Yet Japan’s existing diversification offers little protection from severe global supply shocks.

During the Russia-Ukraine war, Japan’s LNG import costs surged. In April 2021, imports totalled JPY221.3bn, but as Russia restricted pipeline exports to Europe, European demand for LNG pushed global prices higher, and Japan’s own monthly import bill reached nearly JPY600bn, the institute reports. By August 2022, this saw Japan pay over JPY878bn for a single month of LNG – almost four times the April 2021 levels, and this despite Russian LNG comprising only 8.7% of total 2021 imports.

Annually, in dollar terms, LNG import values rose 65% for Japan between 2021 and 2022 while volumes fell 3%. In yen terms, this saw costs jumping by 98% as the currency weakened.

Even now, annual spending remains above 2021 levels although 2025 imports were 8.8mn tonnes lower than four years ago, IEEFA says. These trends illustrate that sourcing diversification does little to insulate Japan – at least from global price shocks.

LNG spot prices have followed a similar trajectory. From $5/MMBtu in February 2021, rising European gas costs pushed Japan’s current spot prices to $56/MMBtu by October the same year with prices exceeding $70/MMBtu the year after. And while Japan relies mostly on long-term contracts, spot market exposure transfers these costs to Japanese buyers when it is needed.

In the years since the start of the war in Ukraine, Japan has also pursued additional LNG deals from the US, signing 7.5mn tonnes per annum of new contracts in 2025 alone, and is expected to average in the region of $5/MMBtu over five years, up from $2.19/MMBtu in 2024.

Yet, even as the ongoing Iran conflict and Strait of Hormuz closure has seen the Japan-Korea Marker benchmark doubling of late and thus reflecting tighter supply and competition with Europe, diversified supply portfolios and crude oil-indexed contracts, do not shield Japanese buyers as is claimed. Approaching week six of the war in Iran, Japan remains fully exposed to Middle East supply disruptions.