Advancing Japan’s LNG strategy: the case for physically-delivered futures

Japan has been a major player in the global LNG market for over 50 years. Historically, long-term contracts with oil-indexed pricing and fixed destination clauses ensured stable supply but limited flexibility. As global energy dynamics shift, from the war in Ukraine to supply disruptions in the Middle East, Japan is responding with a new strategy that emphasises diversification, flexibility, and decarbonisation. To fully realise this vision, Japan also needs tools for price transparency and risk management, including physically-deliverable LNG futures.

During periods of global oversupply, such as early 2020, Japanese utilities bound by long-term contracts paid significantly more for LNG than spot market levels. In 2019, the spread between oil-indexed LNG and spot prices widened to $6.71/MMBtu¹. These mismatches prompted utilities to seek contract revisions and, in some cases, initiate arbitration¹. Japan is now transitioning from a passive consumer to an active participant in global LNG markets, seeking greater control over pricing, supply chains, and risk exposure.

Diversification of supply sources

A key part of this strategy is the diversification of supply sources. While Australia remains important, the US has emerged as a flexible and competitive supplier. In September 2024, Japan imported 14 cargoes from the US, contributing to a major increase in monthly volumes². Southeast Asia and the Middle East also play growing roles in Japan’s LNG portfolio.

Just as important is the move away from rigid contracts with destination restrictions. A 2017 investigation by Japan’s Fair Trade Commission found that destination clauses in FOB LNG contracts could violate antitrust law³. Since then, the share of destination-restricted contracts has dropped from 53% in FY2021 to 42% in FY2022, and is expected to decline further by 2030⁴. Buyers are now structuring contracts with shorter durations and more flexible options for diversions and swaps.

Reliance on shorter-term contracts

As Japan increases reliance on shorter-term contracts and diverse sources, exposure to price volatility grows. Futures markets offer transparent, market-driven pricing that can help importers manage this volatility, hedge supply risk, and make informed decisions.

However, traditional pricing mechanisms have limitations. Oil indexation links LNG to a commodity with different fundamentals⁵. While JKM and Henry Hub offer more gas-on-gas pricing, both are cash-settled and don’t reflect the true delivered cost of LNG⁶. This creates basis risk, a mismatch between the benchmark price and actual costs incurred by Japanese buyers⁷.

Physically-deliverable LNG futures address this by capturing the real price of delivered LNG, including shipping and regasification. These contracts allow buyers to hedge with greater precision and respond to market shifts without being locked into inflexible take-or-pay terms. For power generators in Japan, physically-deliverable futures reduce exposure to price swings and provide a more accurate hedging tool than current benchmarks⁷.

Broader energy and climate goals

Japan’s broader energy and climate goals further strengthen the case for physically-deliverable futures. The government is committed to carbon neutrality by 2050⁸ and aims to generate 50–60% of power from renewables by then⁹. LNG will remain a key transition fuel, supported by efforts like the Asia Zero Emission Community (AZEC), which seeks to replicate Japan’s energy model across the region. At the same time, Japan is promoting CCUS technologies and participating in methane reduction initiatives to minimize LNG’s environmental footprint.

The Strategic Buffer LNG (SBL) framework also reflects Japan’s focus on supply stability. Initially covering one cargo per month during winter, the SBL reserve is expected to quadruple in volume by the mid-2020s¹⁰. Futures markets can support this buffer by offering transparent pricing references and hedging tools for stored volumes.

To meet these evolving needs, Abaxx Commodity Futures Exchange and Clearinghouse has introduced Abaxx North Pacific Asia (NPA) LNG futures, a physically-deliverable instrument tailored to the region with the world’s largest LNG importers. The NPA contract reflects the delivered cost of LNG in North Pacific Asia, offering Japanese market participants a way to manage exposure tied to actual cargo flows.

Essential signals for infrastructure planning

Unlike JKM, which serves as a reference point for spot prices, Abaxx NPA LNG futures support physical delivery. The contract enables buyers to hedge against the real cost of LNG delivered to Japan and complements existing benchmarks by enhancing price discovery and reducing basis risk. With 24 monthly listings and a reliable forward curve, the contract also provides essential signals for investment and infrastructure planning.

Abaxx has also introduced physically-deliverable LNG contracts for Gulf of Mexico and Northwest Europe delivery. Together, these instruments offer importers a global hedging framework: centrally-cleared and designed to support long-term portfolio optimisation.

Futures markets bring added benefits by encouraging more active participation. Greater liquidity and transparency lead to improved pricing efficiency and support Japan’s goal of becoming a more competitive LNG market actor. As finance professor Craig Pirrong has written, futures offer critical tools for managing volatility and ensuring efficient allocation of resources, especially in dynamic global commodity markets¹².

Spotlight on Japan Energy Summit & Exhibition

Japan’s evolving LNG strategy will have far-reaching implications. As the largest LNG importer, Japan’s actions influence global contract structures, pricing terms, and market development. By embracing transparent, physically-deliverable futures, Japan can reduce its exposure to the “Asian premium,” improve procurement flexibility, and enhance energy security.

As participants gather at the Japan Energy Summit & Exhibition in Tokyo this June, the message is gaining momentum: Japan’s LNG transition will require more than diversified supply. It will depend on market infrastructure that reflects the realities of physical trading, with Abaxx’s physically-deliverable LNG futures ready to support the development of smarter, more transparent LNG markets.

CITATIONS

1. Japanese LNG Buyers Seek Supply Flexibility Amid Growing Global Price Volatility. Natural Gas Intelligence. https://naturalgasintel.com/news/japanese-lng-buyers-seek-supply-fl exibility-amid-growing-global-price-volatility/
2. 日本のLNG海外転売量が過去最高を記録. Energy Tracker Japan. https://www.energytracker.jp/20241129_fossil-fuel_japanese_lng/
3. How Japan Thinks about Energy Security. Center for Strategic and International Studies. https://www.csis.org/analysis/how-japan-thinks-about-energy-security
4. Results of the FY2023 Surveys: LNG Handling Volume and Destination Restrictions in SPAs by Japanese Companies. JOGMEC. https://www.jogmec.go.jp/english/news/release/news_10_00053.html
5. The Analysis of Long Term LNG Contract Pricing Structure. Chulalongkorn University Digital Collections. https://digital.car.chula.ac.th/cgi/viewcontent.cgi?article=7935&context=chulaetd
6. Natural Gas Market and Pricing. Gas Exporting Countries Forum. https://www.gecf.org/gas-data/natural-gas-market-and-pricing.aspx LNG Pricing & Risk Management. SAARC Energy Centre. https://www.saarcenergy.org/wp-content/uploads/2021/11/Session-5-LNG-Pricing-Risk-Management.pdf
7. Executive Summary LNG Procurement Strategy and Risk Management. World Bank. https://documents1.worldbank.org/curated/en/344451553842171106/Phase-Two-Liquefi ed-Natural-Gas-LNG-Demand-Projection-Procurement-Strategy-and-Risk-Management-Executive-Summary-Report.docx
8. Toward a Promising Future for LNG: Japan Leads the World in Ensuring Its Stable Supply and Addressing Environmental Issues. Ministry of Economy, Trade and Industry (METI). https://www.enecho.meti.go.jp/en/category/special/article/detail_194.html
9. LNG Expansion is a Burden on Japan's Future. Market Forces. https://www.marketforces.org.au/campaigns/asia/japan-lng-expansion/
10. Interview: Japan Aims to Quadruple 'Strategic Buffer LNG' by Mid-2020s. S&P Global Commodity Insights. https://www.spglobal.com/commodity-insights/en/news-research/latest-news/lng/112723-interview-japan-aims-to-quadruple-strategic-buffer-lng-by-mid-2020s
11. Craig Pirrong: The Streetwise Professor Waxes Poetic on Dodd-Frank, Elizabeth Warren's Dog House and LNG Potential. John Lothian News. https://johnlothiannews.com/craig-pirrong-the-streetwise-professor-waxes-poetic-on-dodd-frank-elizabeth-warrens-dog-house-and-lng-potential/ Published by