(Originally sent to Fukuzawa, ISSHO, and Friends Fri, 28 Feb 1997)

Perhaps you subway commuters down in Tokyo haven't noticed, but gas prices ("gas" meaning the petrol one puts in a car engine) have jumped and stayed at a fixed price. Given that petroleum is Japan's largest import by value, this is significant. It emasculates Hashimoto's much-vaunted deregulations, and confounds market forces and Western economists.

Some background: In the bad old days, Japan's bureaucracy (i.e. MITI, with its heavy-handed treatment of Lion Oil, and its "energy policy" tussles with the Environment Agency over nuclear power) rigged the fuel market so that "necessary fuels" (oil, diesel and kerosene--used for truck transportation and house heating) were sold at an artificially-low price window--40 or so yen for a liter of diesel. Meanwhile, "luxury fuel" (automobile gasoline) was given a far higher price window to offset industry losses (memory dictates 120 to 130 yen to the unleaded liter ten years ago, dropping slowly to around 105 a couple of years back).

However, in 1996 the fuel market was deregulated and market forces allowed to kick in. And how. Like Monty Python's foot, the Invisible Hand came down and squashed conventions. Within weeks, gasoline stands for the first time displayed their prices to entice customers. Within months, diesel shot up to around 70 yen, while gasoline plummetted, breaking first the 100 yen barrier, then the 90! Coming back from Europe this summer, I realized that gasoline was actually a good bit cheaper in Japan than in England, France, or Germany! The best I ever got in Sapporo was 85 yen to the liter.

It turns out that that was as good as it would get.

In late January 1997, according to articles in the Hokkaido Shinbun, Hokusekishou, a business organization I know little about, decided that enough was enough. Saying that 85 yen was selling at a loss. Not surprising; according to the Economist (October 26, 1996, pg 94-6), Japan's gas stands have higher overheads, due to comparatively more gas stands per capita, more staff per stand, and a customer base weaned on free gifts. They can't cut costs by making things self-service because of safety regulations; and, like the rest of the OECD, over half of the price is tax. Hokusekishou announced their price--102 yen per liter unleaded. And overnight on February 1, and I mean this entirely without exception, EVERY gas stand in Sapporo and Asahikawa--even the discount ones--started flashing 102 on their placards.

It's been a full month since the rise--a long time in a market that has reasonable fragmentation. Plenty of companies in Japan sell gas--there are seven major domestic producers (Nippon Oil, Idemitsu, Mitsubishi Oil, Tonen, Cosmo, General, and Japan Energy), so there is nothing here like PEMEX in Mexico. Moreover, Mobil and Shouwa Shell here can be non-Japanese and break ranks. But prices have not changed. Not a single "103", not a single "101". 102 yen, no more, no less (except at one discount place, which has "lowest price in Sapporo" painted on their sign; but even they won't break 100.) Meanwhile diesel prices have levelled off at the 70 yen mark. Having their cake and eating it too.

Since this came on the heels of the yen's precipitous devaluation vis-a-vis the US dollar, I'd smelled an exchange rate effect. But I doubt that's the only reason, because: 1) there was a public price determination, and 2) everyone, but everyone, is following it. The once effervescent market has solidified into a cartel. (Even Hokkaido Shinbun comes out and uses the word--karuteru.)

Whether there is a govt boogeyman enforcing this through Administrative Guidance is unclear. But the point is that deregulation has been stymied, and the designated cartel-busting body, the Japan Free Trade Commission, has been inconclusive in its investigation. So the cartel stays in place until further notice.

Go on, call me a conspiracy theorist all over again, but I would add that this form of price-setting is not unusual in Japanese markets. When I was working at a trading company in Sapporo five years ago, sourcing lumber and building materials, the price of Japanese-made concrete-forming panel (konpane) was set by the oligopolist in the industry--Seihoku Group--which made monthly announcements of their price which everybody followed within a few ten yen. The fly in their market was their fetch--the Indonesian plywood cartel, Apkindo (and its Japan agent, Nippindo), which would always undercut Group's price by as much as ten percent. But it didn't matter--Japan has laws forbidding builders to use materials without JAS or JIS specification in public works projects (and even if foreign products have JAS, nobody I knew dared spend govt money on imports). The effect is desirable again for Japanese producers: foreign companies, if they want to sell anything to Japan's porky public works, have to sell raw materials to domestic factories instead of finished products directly to the consumer. And thus, through informal cartelization, Japan's imports of wood as a raw material remain by far the highest in the world.

Another example of how Japan's brand of capitalism is different. Deregulation, no matter how vaunted by the gaijin handlers, doesn't necessarily mean anything will change. Even if market forces are truly allowed to come into play, somebody moves in to fill the gap and gerrymander on behalf of the producer.

Dave Aldwinckle

Sapporo