Where Will It End?: China’s East China Sea Air Defense Identification Zone

More lines were drawn in the East China Sea (or rather in the skies above it).  With very little notice, China declared a sweeping air defense identification zone (ADIZ) over much of the East China Sea as of November 23 at 10:00 a.m. (local time).  Countries typically use such zones to expand their early warning against potential airborne threats.  Aircraft that fly within those zones are required to file flight plans and identify themselves to the appropriate authorities; otherwise those authorities may dispatch combat aircraft to intercept them.  China’s new ADIZ covers an area that contains two disputed maritime territories.  The first consists of islands, called Diaoyu in China and Senkaku in Japan, that are claimed by both Beijing and Tokyo.  The second is a small submerged rock, called Suyan in China and Ieodo in South Korea, which is claimed by both Beijing and Seoul.  South Korea has operated a small research station there for the last decade.  Shortly after China’s new ADIZ went into effect, its air force mounted its first patrol of the area; Japan spotted a Y-8 maritime patrol aircraft and a Tu-154 electronic intelligence aircraft over the East China Sea.

China’s demarcation follows a widely-publicized 18-day Japanese military exercise across southern Japan.  The exercise was one of an annual series that is normally held in November.  In 2011, a similar exercise was held that involved 35,000 Japanese personnel and the U.S. aircraft carrier George Washington.  After tensions were ratcheted up between China and Japan over the disputed Senkaku Islands in September 2012, Tokyo shelved that year’s exercise.  This year’s iteration involved 34,000 military personnel, six ships, and 360 aircraft.  The exercise featured air defense missile battery drills on Okinawa as well as an amphibious landing, supported by a Japanese helicopter carrier, on the uninhabited atoll of Okidaitōjima, about 250 miles southeast of Okinawa.

China’s new ADIZ requires aircraft operating within the zone to register flight plan, radio, transponder, and logo information with its Civil Aviation Administration.  But the Ministry of National Defense is the “administrative organ” responsible for the zone.  Aircraft that violate the rules of the ADIZ could prompt the Chinese air force to adopt “emergency measures.”  Japan maintains a similar zone around its nearby islands.

Certainly China’s action has reverberated across the Asia-Pacific.  As one South Korean official noted, the focus of South Korea’s upcoming talks with China will likely shift from strengthening trust and cooperation to the ADIZ controversy.  Even Australia summoned the Chinese ambassador in Canberra to express its concern.  But those that could ultimately end up facing a similar situation might be the countries of Southeast Asia.  In announcing the ADIZ, the Chinese Ministry of National Defense referred to its authority over “the area enclosed by China’s outer limit of the territorial sea.”  Of course, there is another “territorial sea” that China claims—the South China Sea.  Within that sea, China has many other maritime disputes.  The most recently visible one is between China and the Philippines over Scarborough Shoal, which led Manila to challenge China’s maritime claims before a United Nations tribunal earlier this year.  There are also the long-running disputes between China and Vietnam over the Paracel Islands as well as among China, Brunei, Malaysia, the Philippines, and Vietnam over the Spratly Islands.  But by mentioning the “outer limit of the territorial sea” China also revives a long-dormant dispute between it and Indonesia over the waters along the northern edge of Indonesia’s Natuna Islands, which have offshore natural gas fields.  China’s use of an ADIZ to strengthen its sovereignty claims in the East China Sea suggests that it might try a similar approach in the South China Sea too.  China’s Ministry of National Defense spokesman, Colonel Yang Yujun, failed to dispel such notions when he said that China would establish additional zones “at the right moment after necessary preparations are completed.”

More practically dangerous for the United States is that China’s ADIZ creates a situation in which American reconnaissance aircraft, which regularly patrol the East China Sea, may increasingly encounter Chinese fighter jets.  (Such patrols have long annoyed China.)  To appreciate the danger, one needs only to recall the April 2001 incident when a Chinese J-8 fighter jet collided with a U.S. Navy EP-3 reconnaissance aircraft over the South China Sea.  The EP-3 was forced to land on China’s Hainan Island where it was interned, triggering a two-week long crisis between China and the United States.

Little surprise, then, that China’s demarcation drew an immediate response from the United States.  Secretary of State John Kerry commented that he was “deeply concerned” and that China’s “unilateral action constitutes an attempt to change the status quo in the East China Sea”; Secretary of Defense Chuck Hagel flatly stated that the United States would not recognize China’s control over the zone.  To make that point clear, the United States ordered two B-52 bombers to make an unannounced transit of the East China Sea on November 26.  No doubt, Washington also wanted to set a precedent for American combat aircraft to operate within the zone without notifying Chinese authorities.

Tokyo took an equally stern tone.  Prime Minister Shinzō Abe said that Japan would not recognize the zone.  He even persuaded Japan’s major airlines not to file flight plans with Chinese authorities on routes through the East China Sea.  Both Japan and South Korea flew military aircraft into the zone on November 27.  Soon after, China announced that it sent more aircraft to patrol the area, including a KJ-2000 early-warning aircraft and several J-11 and Su-30 fighters.

Most likely, China is trying to use the ADIZ to not only respond to Japan’s recent military exercise, but also enhance its sovereignty claims to the East China Sea (and the islands within it).  Earlier, it began maritime law enforcement patrols in the area to do the same.  Hopefully, China understands that it is setting the stage for future conflict if it pushes its claims too hard.  Already, China has chipped away at the credibility of its own diplomatic charm offensive in Southeast Asia, which Beijing just launched at the Asia-Pacific Economic Cooperation forum in October.  Even Southeast Asian countries with less-apprehensive views of China, like Indonesia and Malaysia, cannot help but take notice.

China’s establishment of its air defense information zone in the East China Sea raises another question: why take such a step now?  Is it because China feels the need to immediately respond to Japan’s recent military exercise; or because Beijing knows that the world’s attention is focused on the successful international negotiations in Geneva over Iran’s nuclear program rather than its actions in the East China Sea; or because China sees the Obama administration’s commitment to its Asian allies as fundamentally weak (and wants to test it)?  Thankfully, Beijing decided to declare its ADIZ after Japan concluded its military exercise.  At least, there will be a full year before Japan conducts its next set of military drills in the area.

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What Does the Fox Say?: Japan’s Diplomatic Campaign

After North Korea launched seven ballistic missiles into the seas near Japan in July 2006, Japan did something uncharacteristic for a country that seemed inclined to follow than to lead.  It took the diplomatic initiative.  Japan immediately called an emergency meeting of the United Nation’s Security Council and drafted a resolution that not only condemned North Korea’s missile launches, but also called for sanctions backed by force.

At the time, Japan raised eyebrows.  The world had not heard Japan’s diplomatic voice so clearly on the international stage for almost six decades.  But that was one episode.  Early this year, Japan began a sustained, high-profile diplomatic campaign across Asia.  Soon after becoming Japan’s prime minster for a second time, Shinzō Abe kicked off that campaign with a speech in January 2013 that laid out Japan’s five aims for its diplomacy in the Asia-Pacific:

1. Protect the universal values of freedom of thought, expression, and speech

2. Ensure that the seas are governed by laws and rules, not by might

3. Pursue free, open, and interconnected economies

4. Bring about stronger intercultural ties between the peoples of Japan and the region

5. Promote more exchanges among younger generations

The first two aims have direct relevance to how Japan would like the region to deal with China and its new assertiveness.  Helpfully, they are also consistent with the goals of Japan’s principal ally, the United States.  So too one could say of Japan’s third aim, in light of American efforts to create the free-trade Trans-Pacific Partnership.  The third aim has the added benefit of ensuring that the region’s countries are not drawn solely into China’s economic orbit.  The final two aims have a far longer time horizon.  Japan continues to hope that with greater engagement memories of its imperial past will recede further into history and, in Abe’s hope, that Japan can once again become a “normal country.”

But old ghosts die hard.  Japan’s imperial past still creates barriers in parts of Asia.  Every time a Japanese official (and certainly a prime minister) visits Tokyo’s Yasukuni shrine, which commemorates not only Japan’s 2.5 million war dead but also fourteen war criminals among them, there is an international outcry.  Yet the issue increasingly seems to be one that only animates China and South Korea.  A visit by several cabinet ministers in April 2013 derailed a bilateral summit with South Korean leaders; and another by 150 Japanese politicians in August sparked protests and an official rebuke from China.  For whatever the reason, Southeast Asian countries appear to have largely put the issue behind them in their dealings with Japan.  As a result, Abe has overseen an unprecedented expansion in Japanese ties with Southeast Asia.

In fact, soon after Abe’s election, Japan began to signal that it wanted to strengthen its relationships in Southeast Asia.  Abe’s foreign minister, Fumio Kishida, was dispatched to visit Australia, Brunei, the Philippines, and Singapore.  Meanwhile, Abe himself travelled to Indonesia, Thailand, and Vietnam at about the same time.  In all, Abe has visited every Southeast Asian country this year at least once (including a swing through Brunei, Cambodia, and Laos in November).  He has tried to build on Japan’s economic links to the region with the development of new security relationships.  Japan has offered ten coast guard vessels to the Philippines and conducted joint counterterrorism exercises with Indonesia.

While President Barack Obama missed the APEC summit in October, Abe surely made his mark there.  During a sidebar meeting, he and Vietnamese President Truong Tan Sang agreed to greater cooperation in maritime security, given their mutual concern over “unilateral attempts to change the status quo [of maritime disputes] by force”—a not-so veiled reference to China.  Even more ambitious was Japan’s overture to Russia.  In November, the two countries held their first meeting to enhance their maritime security cooperation, a somewhat odd turn of events given their own territorial dispute over in the Kuril Islands chain.  At the meeting’s concluding press conference, Japan reassured that its new security relationship with Russia in no way diminished its ties to the United States.  (Russia said as much regarding its ties to China.)

Unlike America’s seemingly on-again, off-again approach to engagement in Asia (at least to those in the region), Japan’s diplomatic campaign this year appears steadier, if for no other reason the country must live there.  Outside of the economic sphere, the world has not heard much from Japan in a half century.  It will likely hear more of Japan’s voice in the years to come.

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What the Unit Costs: U.S. Federal Reserve Policy, International Currencies, and Military Procurement

At first glance, the movement of currencies seems to have little to do with the trajectory of military capabilities.  But look closer and what emerges is a clear connection between international finance and international security, particularly for countries whose militaries rely on foreign arms.  Since a country must buy armaments, like other goods, with local currency that must be converted into a foreign one, the exchange rate at which that conversion occurs is very important.  A stronger local currency means a country can buy more from abroad; a weaker one means it can buy less.

Soon after the global credit crisis hit in 2008, the U.S. Federal Reserve quickly loosened monetary policy to support the American economy.  But its trio of quantitative easings—purchases of bonds with newly created money—has had far-reaching consequences.  They not only lifted the U.S. economy, but also weakened the U.S. dollar relative to other currencies.  Fearful that a suddenly weak U.S. dollar would trigger disruptive money flows and undermine their export industries, many countries tried to stabilize their currencies’ exchange rates against the U.S. dollar.  To do so, their central banks slashed interest rates and expanded their monetary bases.  Happily (for the moment), that had the attendant benefit of spurring economic growth.  And so, countries as diverse as Brazil, Indonesia, and South Africa boomed.

But that virtuous cycle is ending.  Before long the U.S. Federal Reserve will start to taper its bond purchases—a first step toward tightening American monetary supply.  As a result, the U.S. dollar has generally strengthened against other national currencies.  For those countries whose currencies have become relatively weaker, that has meant that everything they import is now more expensive, from grain to oil to military equipment.  Countries whose governments subsidize imported food and energy have seen their subsidy expenditures balloon.  In response to such inflation, some central banks have sought to temper the weakening of the currencies by raising interest rates to drain the excess liquidity from their economies.  Unfortunately, that also slows economic growth and strains their capital markets (sometimes in countries whose unemployment is already relatively high).  In any case, both these factors further weaken local currencies, which in turn reduce the foreign purchasing power of their governments’ arms procurement budgets.

The Indian military knows that all too well.  India’s high inflation and a balance-of-payments crisis in the early 1990s caused the value of the Indian rupee to precipitously fall.  Given the concurrent demise of the Soviet Union and its generous arms export terms to India, its hoped-for military modernization plans never transpired.  Costs, in Indian rupees, for new military kit from abroad soared.  Even the prices for spare parts to maintain its legacy Soviet hardware climbed.  Indian warships designed with Russian combat systems in mind went unfinished and those in service became expensive to maintain.  A Godavari-class frigate built in the early 1990s was estimated to cost four times as much as comparable one in the 1980s.

To Indian military leaders old enough to remember that era today must seem uncomfortably familiar.  Reacting to the U.S. Federal Reserve’s increasing monetary restraint and high inflation, the Reserve Bank of India raised interest rates to defend the rupee.  That has slowed the country’s economic growth and, in turn, pressured its currency.  In fact, the rupee slid 14 percent against the dollar between May and August 2013.  With such a currency backdrop, India’s military is finding its new modernization program difficult to achieve, even apart from its internal bureaucratic challenges (perhaps a topic for a future blog).  In one recent example, the Indian navy must decide how to replace the Sindhurakshak, which was lost in an August 2013 explosion.  Early speculation is that the navy will lease another Russian Kilo-class submarine.  But that would entail annual payments which could rise if the rupee falls further.  And if the navy decides to buy a replacement, that submarine would be 14 percent more expensive than it was only four months ago.  Such considerations hinder not only India’ military, but also multinationals selling everything from artillery pieces to attack helicopters, all of which India needs.  Indeed, if New Delhi proceeds with the formation of a new two-division mountain strike corps, it may find its new divisions under-equipped for battle.

A weak currency can also affect developed countries, like Japan.  There, the Bank of Japan has exacerbated its currency’s relative weakness by starting its own aggressive monetary expansion program, just as the U.S. Federal Reserve is ending its.  Consequently, the Japanese yen has plunged 22 percent against the U.S. dollar since last year.  That will impact potential Japanese purchases of OV-22 and long-range unmanned aerial vehicles from the United States.  And that is particularly bad news for Japan’s Air Self-Defense Force, whose technological future rests on the already-expensive American F-35 Joint Strike Fighter.  A weaker yen means that each new fighter will cost more yen.  Under a June 2013 foreign military sales agreement with the United States, Japan agreed to acquire its first four F-35 fighters for $124 million apiece or about ¥10.2 billion each, at the then-prevailing exchange rate of 82 yen to the dollar.  Had they been acquired at today’s exchange rate of 98 yen to the dollar, each new fighter would have cost ¥12.7 billion, almost 25 percent more.

Though Japan’s Ministry of Defense still considers the F-35 fighter as vital to keep a rising China and resurgent Russia at bay, it has already begun to rethink the timing of its purchases.  Originally, Japan planned to complete the acquisition of 42 fighters by 2021.  But given the rising costs, Tokyo might decide to stretch out aircraft deliveries until 2023.   For many of today’s defense planners, it seems wise to include not only include smart weaponry, but also smart currency hedges in one’s arsenal.  The costs of war remain variable.

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Turning Point: Japan’s Upper House Election and National Security

On Sunday, July 21, the Japanese electorate propelled Prime Minister Shinzō Abe’s Liberal Democratic Party (LDP) (together with its partner, the New Komeito Party) to the majority in Japan Diet’s House of Councillors (or upper house).  The victory ends the parliamentary impasse, in which the LDP controlled the lower house and its opponents the upper house.  The biggest issues of the election were Abe’s “three arrow” economic policies and how he hopes to restore Japan’s national power grid.  But many also saw the election as a referendum on Abe’s plans to boost Japan’s self-defense forces and possibly even amend Article Nine of the country’s constitution, which renounces the threat or use of force to settle international disputes and prohibits Japan from establishing formal armed forces.

Though the victory was not large enough to immediately pass a constitutional amendment, it has raised concerns among those Japanese who oppose any revision to Article Nine.  They worry that Japan could experience a resurgence of its pre-World War II militarism or, at the very least, could be pulled into foreign conflicts by its main ally, the United States.  Others, however, are open to amending the constitution; they believe the document, largely written by American lawyers in the occupation authority, should better reflect the needs and will of the Japanese people.  And an increasing number wonder whether the real question is not why Japan should consider amending its constitution, but rather why it has not already done so?  Many young Japanese (like many young Germans) wonder how long their country must repent for and be constrained by the sins committed by their forbearers nearly 70 years ago.  They would like Japan to become, in Abe’s words, an “ordinary country.”

Of course, the debate within Japan has not occurred in isolation.  There have been calls from abroad for Japan to better meet its international security obligations as a major developed country.  After the Persian Gulf Conflict in 1991, some (mainly Americans) found fault with Japan’s contribution to the Coalition war effort, which came largely came in the form of dollars (over $10 billion of them), rather than soldiers.  By the early 2000s, Japan had begun to send small military detachments overseas, usually in clearly defensive, humanitarian, or peacekeeping roles.  Its ground forces were deployed to Iraq as part of the reconstruction effort after 2003 and its maritime forces escorted allied shipping through the Indian Ocean.  And since its inception, Japanese warships have participated in the multinational anti-piracy patrol in the Gulf of Aden.

But it has been Japan’s increasingly worrisome security environment over the last several years that has really spurred many Japanese to reexamine the role of their self-defense forces and seriously consider changes to Article Nine for the first time.  North Korea’s unusually prolonged saber rattling this past spring only served to underscore their heightened sense of insecurity.  Despite Japan’s alliance with the United States and much bandied-about American pivot to Asia, other powers in the region seem bent on exploiting Japan’s pacifism.  Since the mid-2000s, Japan has closely monitored a rise in Russian incursions into Japanese airspace as well as a steady increase in the number of Chinese warships that pass near its southern islands and, in some provocative cases, circumnavigate Japan’s home islands.  And, of course, over the last year tensions between China and Japan have risen as a result of their territorial dispute in the East China Sea, which includes the sovereignty over the Senkaku (Diaoyu) Islands.  Indeed, in the week prior to Sunday’s election, China began drilling for oil in a disputed area of the East China Sea, prompting Japan to dispatch a geologic survey ship.

Even so, any overhaul of Japan’s self-defense forces will take time.  It took almost a decade for Japan’s annual defense white paper to even acknowledge that a rising China presented new challenges, presumably because Tokyo wanted to reduce the potential for Chinese backlash against Japanese commercial interests in China.  Following the Cold War, far more Japanese have been concerned about reviving their national economy rather than their national security.  Most believed that the qualitative superiority of Japan’s self-defense forces was sufficient to ensure their safety.  But after years of under investment, together with China’s rapid military modernization and Russia’s revival, Japan has seen its qualitative margin eroded.  And given the recent behavior of its neighbors, a growing number of Japanese feel that more attention must be given to national defense, either with or without an amendment to Article Nine.  The Japanese media frequently reports on the strains that constant patrolling of disputed airspace and waters have put on Japan’s self-defense forces and coast guard.  At a practical level, there is much to do, even apart from new hardware procurement—from making Japan’s self-defense forces work together more jointly to deciding how (and under what circumstances) they would be used.  If tangible progress is made, then the election will have proven itself to be a turning point for Japanese national security.

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North Korea Moves to War Footing

It seems like we’ve all seen this movie before.  North Korea feels affronted and blusters; South Korea and the United States respond with negotiations and a concession or two; China and Russia seek a peaceful resolution (plus the survival of their buffer neighbor); and Japan just wants the problem to go away, which it does—until the next time North Korea feels affronted.

But this time North Korean Supreme Leader Kim Jong-un has ratcheted up tensions beyond the country’s usual bluster.  On March 11 North Korea invalidated its sixty-year armistice with South Korea.  And after the participation of two B-2 nuclear-capable bombers during a joint exercise between American and South Korean forces, on March 29 Pyongyang declared a “state of war” between it and South Korea, threatening to strike not only its southern neighbor, but also the United States (nominally Alaska, Guam, and Hawaii, since North Korean missiles can only reach that far).  With a modern military of its own, South Korea has vowed to respond if attacked.  And, of course, there are about 25,000 American troops stationed in the country, too.

So what strategy should the United States pursue in this latest crisis on the Korean Peninsula?  Surely, in crafting its approach, Washington should keep in mind its most important long-term interest in the region which, in my opinion, is the strengthening of the American alliance with South Korea and Japan.  That alliance is crucial to counterbalance a rising China and resurgent Russia in Northeast Asia.  But to arrive at a practical strategy for this crisis, it is informative to start by considering some strategic extremes and what effect they may have on that alliance:

The United States could advance an escalatory strategy to demonstrate to North Korea that it cannot continue to bluster at every perceived slight.  And if war comes, so be it.  The United States has adequate anti-ballistic missile defenses aboard Navy warships to defend Hawaii and Army air defense batteries could be dispatched to protect Alaska and Guam.  Of course, Seoul may not feel as secure if North Korea launches a large-scale conventional attack or nuclear weapons against it; but more likely Pyongyang will take more limited military action.  Such an outcome would likely lead South Korea and Japan to further bolster their defenses, though perhaps not with nuclear weapons (unless North Korea uses them first).  And a militarily stronger South Korea and Japan could better maintain the balance of power in Northeast Asia, removing some of the burden from the United States.

At the other end of the spectrum, the United States could adopt an appeasement policy—giving North Korea what it wants in exchange for a de-escalation of tensions—and return to waiting for Kim Jong-un’s regime to collapse.  While appeasement may not please the American ear, it is an option that would remove the specter of armed conflict and would be practical if one believes that time is on one’s side.  Of course, there may be a big knock-on effect: America’s guarantee of extended deterrence would ring a bit hollower in South Korea and Japan (not to mention in Taiwan, the Philippines, and Southeast Asia).  Still, South Korea and Japan would likely further bolster their defenses, this time probably with nuclear weapons.  In this case, the balance of power outcome in Northeast Asia might still resemble the former, but the level of trust among South Korea, Japan, and the United States would likely suffer.

Ultimately, the approach the United States will take is likely to fall in between the two extremes.  The Obama administration’s “strategic patience” is one.  It seeks to break the cycle of North Korean bluster by simply waiting for North Korea to back down and seek negotiations without any concessions from South Korea or the United States.  Kim Jong-un is now putting that strategy to the test.  In the meantime, the United States deployed F-22 fighters to South Korea on Sunday.

However this crisis ends, South Korea and Japan are likely to strengthen their armed forces.  In the long run, that should benefit the United States, if it can keep the alliance strong.  So, in dealing with this crisis, Washington would be wise not to take an approach without first learning and integrating the views of South Korea and Japan—because not only will they bear most of the consequences (both intended and unintended) of any strategy to deal with North Korea, but also the United States would benefit from avoiding any approach that may create divisions between it, South Korea, and Japan, and in doing so inadvertently weaken the alliance that is so vital for the broader regional balance of power.

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Winds of Change: Comparative Energy Security Policies

The meltdown of three reactors at Japan’s Fukushima Dai-Ichi nuclear power plant, following the Tōhoku earthquake and tsunami on March 11, 2011 (3/11), was a terrible event.  But for some renewable energy advocates, it also created an opportunity.  There was an immediate revulsion toward nuclear power around the world.  Even in France where three-quarters of the country’s electricity comes from nuclear power, popular opinion unambiguously swung against its continued use.  Across the border, Germany abruptly declared that it would abandon nuclear power and hasten its transition to renewable energy sources such as wind and solar.

How countries change their reliance from one energy source to another is often a hotly debated issue.  Nuclear power was once heralded as a low-cost and environmentally-friendly energy source—a way to end the need for dirty coal and oil.  But after Three Mile Island’s partial meltdown in 1979 and Chernobyl’s catastrophic meltdown in 1986, nuclear power fell out of favor.  But by then, many countries, including Japan and Germany, had already integrated nuclear power as part of their national energy mix and change would entail costs.  But what those costs would be were uncertain.

Until the Fukushima Dai-Ichi meltdown, Japan operated 50 nuclear power plants, generating 30 percent of the country’s electricity.  In fact, in 2002 the Japanese government sought to increase the share of nuclear power in the country’s energy mix to 40 percent by 2017.  Similarly, Germany operated 17 nuclear power plants, providing almost 20 percent of the country’s electricity.   For years, conventional energy supporters and renewable energy advocates clashed over just how quickly and how painful a transition from nuclear power to renewable energy sources would be.  Conventional energy supporters warned of a major economic shock if such a transition was not done gradually.  Meanwhile, renewable energy advocates played down the potential for economic pain after a transition was made.

But after Japan’s 3/11 disaster, both sets of advocates were proven wrong (and right).  The warning from conventional energy supporters was disproved first.  Within two months, Japan shut down 33 nuclear power plants, and two years later only two remained in operation.  Meanwhile, in Germany, eight nuclear power plants that were offline for testing or repair were kept shuddered.  A combination of increased use of coal-fired power plants and renewable energy sources and energy conservation measures—particularly stringent ones in Japan—made up for much of the electricity shortfall.  The economies of both countries muddled through 2011; no economic calamity ensued.

However, renewable energy advocates were also shown to be off the mark.  Two years on, the sudden change from nuclear energy to other energy sources has gradually eroded both countries’ economic competitiveness through higher electricity prices.  As a result, Japan has begun to look to imported natural gas, shipped to the country as liquefied natural gas (LNG).  Japanese electric utilities now seek LNG sources for new gas-fired power plants.  But despite long-term LNG contracts, such plants do expose the country to natural gas price and currency fluctuations over time.  For example, the recent 10 percent decline in the Japanese yen vs. the U.S. dollar pushed up natural gas prices roughly the same amount because natural gas is priced in U.S. dollars.  Japanese industry has long worried about the impact of higher energy costs and has begun to lobby its government to restart idle nuclear power plants.  And with the Japanese economy trapped in multi-decade stagnation, Tokyo seems willing to try, not only to help Japanese industry, but also raise consumer consumption.

Similarly, electricity prices in Germany are now 15 percent higher than the average in the rest of the European Union.  German consumers already pay more for electricity than most other Europeans and have seen their electricity bills climb 40 percent over the last five years to pay for renewable energy subsidies.  Hence, some in Germany have come to wonder whether its Energiewende [energy transition] will lead to lower future economic growth as businesses—particularly those in energy intensive sectors such as machinery and steel—have shown signs of disinvesting in Germany and locating elsewhere.

Moreover, Germany’s shift to renewable energy sources has made the country’s electrical grid more difficult to manage.  The amount of electricity put on a gird must precisely match the amount that is consumed; otherwise variations in voltage could cause rolling blackouts.  Unfortunately, wind and solar energy sources can only generate electricity intermittently.  So even as these sources have become a larger part of Germany’s energy mix, the country’s electrical grid needs a way to smooth out their unpredictability.  That can only be done with conventional energy sources.  And since Germany is committed to phasing out its coal-fired power plants, it is now reconsidering the potential of fracking to fuel gas-fired power plants.

Thus, while it is possible to quickly change from one energy source to another without major mishap, the process cannot escape market fundamentals altogether.  Japan and Germany still need reliable and cost-effective energy sources to remain industrially competitive in the world.  Otherwise some industries will migrate to comparable countries, like the United States where fracking has contributed to a revival of American industrial production.  Renewable energy sources have demonstrated that they can meet a substantial share of modern electricity demands, but certainly not all or even the bulk of it—at least not until an innovator creates the better battery.

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