Japan’s Resilience and Growth Strategy Tested in an Era of Energy Transition

SuzukiDuring your years at MITI and METI, you led Japan’s trade and industrial policy with great distinction. Could you tell us how those experiences have shaped the perspective you hold today?

TerazawaIn 1990, I took up my first post as Deputy Director in what was then the Power Development Division of the Agency for Natural Resources and Energy (ANRE). This division was responsible for all aspects of the power sector: short- and long-term supply and demand, fuel procurement, and facility planning. It also supported the selection of power plant sites, so its duties were extremely broad. I had just returned to Japan after completing my studies at Harvard Business School, and a difficult challenge awaited me right away.

As it happened, 1990 was the year when the summer electricity supply-demand balance became so tight, particularly in the Tokyo Electric Power Company (TEPCO) service area, that there was a risk of blackouts. At the time, energy demand was growing rapidly, fueled by the bubble economy. On the supply side, however, capital investment in facilities was insufficient, partly due to the economic slump following the second oil crisis. Against that backdrop, we faced an extremely serious issue: how to respond to the tight supply-demand situation. In the midst of all this, the Gulf War broke out. On top of the tight supply-demand situation, we also had to deal with energy security issues.

So, first, to increase supply capacity, we began studying the expansion of nuclear power plants. At the time, nuclear power faced strong headwinds as a result of the Chernobyl nuclear power plant accident in 1986. Under those circumstances, I worked hard to advance nuclear power policy while seeking the understanding of local communities.

Next, we looked at strengthening the transmission grid. At that time, electricity supply and demand outside the Tokyo area were relatively less tight. We therefore worked to strengthen the grid so that electricity could be transferred from other areas to those facing tight supply.

In addition, interest in global environmental issues was growing across society, partly because it had been announced that the United Nations Conference on Environment and Development (UNCED/the Earth Summit) would be held in Rio de Janeiro, Brazil, in June 1992. In response, we established a surplus electricity purchase scheme, under which electric power companies bought surplus solar power at retail prices. We thus promoted the purchase of renewable electricity as a voluntary initiative a full 20 years before the feed-in tariff (FIT) system was introduced in 2012. Today, feeding electricity from renewable sources into utility grids—known as “reverse power flow”—is common practice, but back then it was not permitted because it was thought to undermine grid stability. I worked tirelessly to make it possible.

Although I served as Deputy Director for only two years, looking back now, the difficult problems I faced during that period overlap precisely with the challenges Japan faces today. How should we advance the use of nuclear power? How should we increase renewable energy? How should we stabilize electricity supply and demand? How should we develop the transmission grid? And on top of that: How should we address global environmental issues? How should we deal with geopolitical issues? I believe it is precisely my experience during those two years that underpins my current responsibilities.

Later, in September 2011, I became Executive Secretary to Prime Minister Yoshihiko Noda. It was just six months after the accident at the Fukushima Daiichi Nuclear Power Station, and I devoted myself to bringing the situation under control and stabilizing it, as well as to the reconstruction of the entire Tohoku region. I was also involved in efforts to restart two reactors at the Ohi Power Station (Ohi-cho, Ohi-gun, Fukui Prefecture). It was the first restart of a nuclear plant since the Fukushima accident roughly a year earlier, and partly for that reason it was a difficult phase, with public opinion sharply divided. Under those circumstances, the Cabinet at the time approached the matter with determination, believing that restarting nuclear power plants was essential to Japan’s economy and people’s lives. Watching this up close, I was reminded anew of how important a stable balance of energy supply and demand is, and I came to realize how difficult it is to gain public understanding, particularly regarding the use of nuclear power.

SuzukiYou have repeatedly faced particularly difficult periods in addressing Japan’s energy challenges, and it is precisely because you overcame them that you are where you are today.

TerazawaIf I were to mention one more major assignment from the period that followed, it would be my appointment in 2015 as Director-General of the Trade and Economic Cooperation Bureau. The issue at the time was the Obama administration’s restrictions on coal-fired power. Committed to tackling global environmental issues, the Obama administration had formulated its Climate Action Plan in 2013. It was strongly pushing a move away from coal-fired power—for example, by halting, in principle, U.S. government financing for new coal-fired power plants overseas. Partly as a result, every time coal-fired power came up in meetings between President Barack Obama and Prime Minister Shinzo Abe, the two sides’ views remained at odds. This was because the Abe Cabinet believed that coal-fired power was not necessarily bad from the standpoint of global environmental issues. On the contrary, it believed that using Japanese technology to promote high-efficiency coal-fired generation in emerging economies and elsewhere would actually help address those issues by reducing CO2 emissions.

Even under these circumstances, with COP21 set to open in late November 2015, we needed to conclude negotiations with members of the Organisation for Economic Co-operation and Development (OECD), including the United States and the European countries. In the end, support for inefficient coal-fired power was discontinued, while support for high-efficiency coal-fired power was permitted. Partly because the cost of renewable energy was still high at the time, high-efficiency coal-fired power was accepted as a realistic option, and it was agreed that the arrangement would be reviewed after four years.

As this episode illustrates, finding realistic solutions to global environmental and energy issues requires balancing these objectives with cost considerations. I feel that this experience, too, underpins my current responsibilities.

SuzukiI would like to ask you about the macro picture and energy security. Today, the energy landscape is more complex than ever. It now combines geopolitical risks, such as the situations in Ukraine and the Middle East, with a surge in electricity demand driven by expanding AI use and the construction of new data centers. What do you see as the essence of these major changes in society?

TerazawaAfter the first and second oil crises, there was a period in Japan when people were keenly aware of energy security. But human memory inevitably fades over time. From around the late 1990s to the early 2000s, energy became a commodity. In other words, it came to be seen as something that is simply there, like air or water. As I recall, energy demand was not growing much at the time, there were no energy security issues, and the prevailing attitude was that all that mattered was a low price.

That perception was overturned by the accident at the Fukushima Daiichi Nuclear Power Station and the experience of rolling blackouts. The restart of the Ohi Power Station that I mentioned earlier was also unavoidable, given the electricity supply-demand situation. Maintaining a stable balance of electricity supply and demand cannot be taken for granted, and not just any electricity will do. It was in 2011 that public sentiment began to shift in this way.

Then, in October 2020, Prime Minister Yoshihide Suga declared that Japan would achieve carbon neutrality by 2050. This brought calls to curb CO2 emissions, not just to ensure a stable energy supply, and the quality of energy began to come under intense scrutiny.

Furthermore, Russia’s aggression against Ukraine, which began in February 2022, followed by the U.S. and Israeli attacks on Iran in February 2026, drove home the fact that sufficient quantities of energy must also be secured.

Meanwhile, electricity demand, which had been declining since 2007, has now reversed course and started to rise again. This is because electrification is advancing, mainly in industry. The drivers are the construction of new data centers as AI use expands, the reshoring of semiconductor production and other industrial activities, and the shift in steelmaking from blast furnaces to electric arc furnaces. In short, we must secure enough supply to meet electricity demand while working under constraints such as the need to reduce CO2 emissions. Energy, which had become commoditized and was taken for granted, now faces major challenges that are extremely complex and fraught with inherent contradictions. Energy is what sustains Japan’s industry and the lives of its people, and the energy situation is directly linked to international competitiveness. That is the highly complex situation we find ourselves in today.

SuzukiIn this difficult situation, fuel is one important element of a stable energy supply. But another challenge is building a comprehensive supply chain that can reliably procure and supply infrastructure equipment, such as power generation facilities and transmission and distribution networks, as well as the critical minerals, such as rare metals, needed to manufacture that equipment. As priorities shift from an overemphasis on “cost” to a focus on “resilience,” what bottlenecks do you think Japan faces, and what strategies should it pursue?

TerazawaThe term that sums up the current situation best is “energy trilemma.”^*1 It is extremely difficult to achieve the 3Es—Environmental Sustainability, Economic Efficiency, and Energy Security—at the same time.

From an energy security perspective, I believe it is extremely important to build diverse supply channels. That calls for a broad view: we must secure not only fuel but also infrastructure facilities and equipment, along with the critical minerals essential for manufacturing that equipment.

As electricity demand rises again, the products and facilities needed to advance carbon neutrality become indispensable and securing them could become a bottleneck for Japan. Ensuring a reliable supply of the necessary facilities and equipment is an essential condition for the energy transition and for growth.

At such a juncture, Hitachi will have an important role to play. Developing energy-related technologies and building resilient critical-mineral supply chains in which Japan itself takes part are extremely important national policy priorities. I have high expectations for the contributions of Hitachi, with its wide range of technologies.

SuzukiThank you. The EU is ahead on carbon neutrality and on biodiversity, and partly for that reason Hitachi is stepping up its own efforts, including joint research with Imperial College London (ICL). We will also continue to work vigorously to build resilient supply chains.

SuzukiWhat innovation areas do you think Hitachi should focus on in particular?

TerazawaWhen we have to secure a stable supply of energy that meets both quantity and quality requirements, solutions are hard to find within the conventional energy sector alone. There are limits to what can be achieved in energy reform through traditional green transformation (GX) alone. This is exactly where digital transformation (DX) comes in. Hitachi is actively pursuing DX as well, and leveraging DX will likely be key to GX too.

Take energy conservation, for example. Japan has been working on energy conservation since the oil crises, but traditional energy-saving methods are now like wringing a dry towel—we have reached the point where we cannot squeeze out any more savings. I believe that applying AI will open up a whole new dimension of energy conservation.

Some argue that using AI will actually increase electricity demand and therefore represents nothing more than a burden, but I disagree. The potential to use AI to make economic and social activities more efficient and to further promote energy conservation remains largely untapped, and I believe this is an area with considerable potential for growth. To achieve this, however, it is essential to have the know-how to apply digital capabilities to the real world. In Hitachi’s terms, that means having both IT and OT (operational technology). Hitachi is engaged in Energy, Mobility, and Connective Industries—all the fields that form the very core of Japan’s industrial base. These efforts will make a major contribution to streamlining real-world operations through AI.

These days, when I read the newspapers, I mostly see articles saying that rapid advances in AI technology make data centers indispensable and will require even more electricity. But there is still plenty of room to make AI itself more energy-efficient and to improve the efficiency of data centers. Currently, attention is focused on cooling data centers, but that is not the only issue. We should also look at improving the efficiency of electrical equipment, semiconductors, and even algorithms. There are also high expectations for Photonics-Electronics Convergence^*2, which is said to contribute greatly to reducing power consumption. In other words, I believe the potential of AI will expand greatly across all phases and domains—such as streamlining operations through AI, making AI itself more energy-efficient, and improving the efficiency of entire energy systems through AI.

These initiatives can also be applied to EMDEs^*3, such as those in Southeast and South Asia, where energy demand is set to grow. The goal is to pursue carbon neutrality for the planet as a whole: expanding investment in energy while keeping that investment as efficient as possible, and at the same time raising living standards. To achieve this, GX in EMDEs is truly the key. I look forward to seeing Hitachi’s contributions toward the three goals in these countries: protecting the global environment, achieving growth, and enhancing well-being.

SuzukiAs you say, connecting and optimizing the digital and real worlds through IT × OT × products is one of Hitachi’s strengths. Systematically streamlining power systems and data centers is also extremely important. Recently, attention has also turned to “watt-bit collaboration,” which aims to develop and operate two kinds of infrastructure in an integrated way so that both are optimized: power infrastructure, such as power plants that supply electricity (watts), and communications infrastructure, such as data centers that handle information (bits). Here, too, we at Hitachi believe we can contribute by drawing on our extensive capabilities.