With Prime Minister Shinzo Abe’s visit to Iran, Japan is aiming to leverage their traditionally amicable ties to help de-escalate tensions in the Middle East — a critical region for his resource-poor country.
One important aspect of those ties, which date back to 1929 and mark their 90th anniversary this year, is trade in oil. Iran has been among the major exporters of the energy resource to Japan, along with Saudi Arabia and the United Arab Emirates.
Abe arrived in Tehran on Wednesday evening for a bilateral summit with Iranian President Hassan Rouhani. The two-day visit through Thursday is the first trip to the country by a sitting Japanese leader in more than four decades. It also comes as U.S. President Donald Trump’s hard-line stance on Tehran has prompted the Japanese government and companies to take a fresh look at their approaches to the Middle Eastern country.
In early May, the United States ended sanctions waivers it had granted to Japan and other buyers of Iranian oil. “It’s not the first time that companies have been swayed by U.S. decisions related to Iran. But the impact cannot be ignored,” one industry source said.
With rich natural resources that also include natural gas and a population of over 80 million, Iran is seen as having growth potential.
But the Iranian economy is also reeling from the impact of the U.S. sanctions imposed following Washington’s withdrawal in 2018 from an international nuclear accord.
When the landmark agreement was reached in 2015 between Iran and six other major powers, and the sanctions that had been in place were subsequently lifted in exchange for Tehran curbing its nuclear activity, Japanese companies — from trading houses to automakers — were among those keen to explore business opportunities.
In 2016, Japan and Iran signed an investment agreement designed to ensure equal treatment of companies and offer protection of their investments.
Trump’s decision in May 2018 to withdraw from the nuclear deal, which had been signed under his predecessor Barack Obama, was based on his view that it was too lenient, and a “disaster.”
Of the sanctions now targeting a range of sectors from automobiles to energy, those on financial transactions by foreign entities with Iran’s central bank and designated local banks have been especially biting for Tehran.
Industry watchers say multinational companies effectively have to choose whether to do business with Iran or the United States.
Before the United States targeted crude oil, Iran supplied nearly 5 percent of Japan’s imports of the precious energy resource.
That share stood at 4.7 percent in April, down from 9.1 percent in the previous month, according to the latest government data.
Oil wholesalers in Japan have shifted to other crude exporters due to the U.S. sanctions, according to Takashi Tsukioka, who heads the Petroleum Association of Japan.
“We hope (the Japanese government) will make strenuous efforts so imports can be resumed,” Tsukioka said at a recent news conference.
This is not the first time that the oil sector has been affected by U.S.-Iran relations. Japan had an interest in an oil field in Azadegan, southwestern Iran, which is estimated to have crude oil deposits of around 26 billion barrels.
The predecessor of Japanese oil exploration company Inpex Corp. acquired a 75 percent stake in the Azadegan field in 2004, but later reduced its stake as ties between Iran and the U.S. worsened in 2006.
In 2010, Inpex decided to withdraw from the project, giving up its 10 percent stake asthe firm endeavored to avoid inclusion on a list of companies subject to U.S. sanctions against Iran over its nuclear program.
For corporate managers who have offices in Iran, taking a wait-and-see approach may be an option.
Japanese firms such as trading, housing, engineering and machinery firms had a total of 32 offices in Iran as of 2017, according to government data.
In a survey conducted by the Japan External Trade Organization, or JETRO, between September and October last year, most of the 20 Japanese companies doing business there cited growth potential and a generally good sentiment toward Japan as positive factors.
But 95 percent cited instability in the political and social situations in the country as major difficulties in making investments. Amid uncertainty over U.S. sanctions, 60 percent said they will likely downsize their businesses there.
“Iran is a resource-rich nation but it also has diverse sectors, from auto to food and medical equipment, that have growth potential,” said Daisuke Yonekura, deputy director of the Middle East and Africa division at JETRO.
“But starting new business projects or making investments is now difficult due to the U.S. sanctions,” Yonekura said. “The severe environment for Iran will likely continue for the time being.”
The Iranian economy marked a 12.5 percent expansion in 2016 following the nuclear deal that led to the lifting of crippling sanctions on the country.
The International Monetary Fund projects that Iran will see negative growth of 6.0 percent in 2019 while inflation will rise 37.2 percent from a year ago, causing pain for many in the country.