Photo/Illutration A sign at a gas station in Tokyo’s Minato Ward on Nov. 9 says 169 yen per liter for regular gasoline. (The Asahi Shimbun)

With gas prices rising to their highest levels in seven years, the government is forging a new subsidy program for oil distributors to hold down prices once they hit a certain threshold.

The move, announced by economy minister Koichi Hagiuda on Nov. 16, is aimed at keeping the markup of retail gas prices in check to prevent derailing Japan’s economic recovery from the coronavirus pandemic.

But offering subsidies to wholesalers with the goal of holding down price rises is unprecedented and raises questions about whether it is effective and fair.

The average retail price of regular gasoline in Japan has continued to climb for 10 straight weeks, hitting 169 yen ($1.48) per liter as of Nov. 8, according to a report by the Oil Information Center at the Institute of Energy Economics Japan.

The figure is the highest in almost seven years.

Some government officials are calling for offering up to 5 yen per liter in subsidies to wholesalers when the average retail gas price tops 170 yen per liter.

The government is also considering whether kerosene and light oil should be subsidized.

The gas subsidy program is expected to be incorporated into an emergency economic package that the government will compile as early as Nov. 19.

The government expects to start the program by the year-end, using reserves set aside for the current fiscal year.

Gas prices tend to soar in winter when demand for crude oil spikes.

And prices could continue to rise until the end of March.

Although the government has decided on a gas subsidy program, it still needs to flesh out many details, including the total cost of the program.

The Ministry of Economy, Trade and Industry is seeking to get oil distributors to promise they will curb wholesale prices in line with the amount in subsidies they will receive.

The ministry also plans to call on gas stations to keep retail gas prices in check.

But it is unclear whether the plan will rein in retail gas prices, as each gas station sets its own retail gas price after taking into account transportation and labor costs on top of wholesale prices.

The ministry will consider ending the oil subsidy program when its survey of gas stations across the nation finds that gas prices have gone down overall. The ministry plans to expand the number of gas stations to be covered for the survey to get a fuller picture. 

But the program would also risk triggering price fluctuations in various sectors once the program’s termination is announced.

Another question about the program is whether it is appropriate to subsidize only gasoline prices with taxpayer money.

Soaring crude oil prices is causing a surge in prices for a wide array of products and services.

Tomohisa Ishikawa, head of the Macro Economics Research Center at the Japan Research Institute, expressed skepticism that the benefit of the program could fail to reach retailers downstream after all.

“Reducing related tax rates would prove more effective in broader areas,” he said. “But the government is turning to a subsidy program instead because cutting tax rates would be a time-consuming process, as the law must be revised."

He said how to secure fairness in the program is a challenge facing the government.

Hideo Kumano, chief economist with the Dai-ichi Life Research Institute, said wholesalers could become the target of backlash when the program is implemented.

"Lowering the tax on gasoline would secure a higher level of transparency while tackling rising gas prices" rather than giving subsidies to oil distributors, he said.

Kumano also underlined the need for preparing an exit strategy in advance to terminate the subsidy program once retail gas prices begin to decline.

(This article was compiled from reports by Satoshi Shinden, Junichiro Nagasaki and Eisuke Eguchi.)

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