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Source: Reuters

ANALYSIS-As tolls halve, Japan drivers hit the highways

Published: 04 Jun 2009 23:51:02 PST

* Toll discount triggers 10 pct surge in highway travel

* Gasoline demand fall seen smaller than 3 pct govt forecast

* Discounts may be extended to some weekdays in Aug, year-end

* http://graphics.thomsonreuters.com/069/JP_HGWY0609.jpg

TOKYO, June 5 - An unexpected new trend is threatening to forestall the swift decline in Japan's oil demand -- a newfound zeal for U.S.-style highway holidays.

While motorists in the world's No. 3 oil consumer are unlikely ever to take their auto affection to the same extremes as their U.S. counterparts, a surge in highway travel after Tokyo discounted costly tolls and a recession that saps interest in costlier overseas holidays could signal a turning point.

Despite early forecasts that gasoline demand would contract for a fifth year due to a shift towards fuel-efficient cars, sustained higher global prices and a shrinking pool of active drivers as the population ages, some analysts now say usage could thwart expectations to hold steady or even rise.

"I think there is at least a 50 percent chance that gasoline sales volumes will be in positive territory (this fiscal year)," said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.

To be sure, that outlook would be at risk if oil prices <CLc1> extended their gains beyond this week's seven-month high of nearly $70 a barrel, still half last year's record high.

But recent data showing that highway car travel rose at its fastest rate in years suggests that even some of the country's hyper-environmentally conscious citizens reckon they've earned the right to hit the open road with smaller, more efficient cars.

"I paid only 1,000 yen ($10) and it was a good bargain," said 42-year-old Mitsuhiro Nayuki, of Chiba prefecture, east of Tokyo, who coasted 87 km (54 miles) on highways in scenic Shikoku in western Japan in a rental car one Sunday last month.

"Because it's cheap, I want to go again. I wish I could go abroad, but it costs."

It's a trend that could run for years if the opposition Democratic Party -- which has pledged to make one of the world's most expensive highway systems free -- wins the next election, due to be held by October at the latest.

This could be good news for the likes of Nippon Oil Corp <5001.T>, whose President Shinji Nishio told Reuters this week that he feared the country would have to shut down a fifth of its refining capacity, some 1 million barrels per day (bpd), as demand deteriorated faster than forecast.

And, surprisingly, it could be good news for environmentalists: The government estimates that carbon emissions could actually decline slightly with a 20 percent rise in highway traffic as motorists in smaller cars on longer, higher-speed journeys achieve even greater fuel efficiency.

INCENTIVES GONE AWRY

In late March, the government implemented a 50 percent discount on highway tolls for passenger cars and motorcycles equipped with electronic toll collection (ETC) systems on weekends and holidays, with a ceiling cost of 1,000 yen ($10) irrespective of the distance travelled.

It will remain in effect until end-March 2011, and could be extended to weekdays during the "obon" holidays in mid-August, when gasoline sales typically peak. Before the discount, Japanese highway drivers paid about 25 U.S. cents per kilometre driven, six times the U.S. average and double that of France.

While the discount was ostensibly meant to stoke the flagging economy, it also fuelled a surge in car travel.

Data released last week by highway network operator East Nippon Expressway Co showed that in April minivehicles and passenger cars on average travelled a distance 14.3 and 11.7 percent longer than a year earlier -- the largest percentage gain since data collection began in October 2005.

That offset a sharp 11.6 percent decline in large truck/bus travel as a recession gripped the world's No. 2 economy.

Data from another highway operator, Central Nippon Expressway Co, also showed minivehicles and passenger cars travelled 9.3 percent and 8.2 percent longer in April, figures all the more impressive given a huge one-month fuel tax break last year.

There were also signs that robust highway use continued through the Golden Week holidays in early May, when many people returned home from the cities where they worked.

East Nippon Expressway reported that average cars travelled 82 kilometres (51 miles), up 23 percent from a year earlier, from May 2 to 6.

For a graphic on eastern Japan's highway usage, click: http://graphics.thomsonreuters.com/069/JP_HGWY0609.jpg

For graphics on Japan's gasoline demand click: http://graphics.thomsonreuters.com/069/JP_GSLS0609.jpg http://graphics.thomsonreuters.com/069/JP_GSLSAN0609.jpg

Record-high oil prices above $147 a barrel last summer crimped gasoline sales by as much as 14 percent.

Despite being a nation that is increasingly both car- and emissions-shy, there is room for growth in highway travel in Japan, which stands at only 13 percent of all road travel, government figures show. That's well below 31 percent in the United States, 30 percent in Germany and 21 percent in France.

MOTOR FUEL REVVING

With more and more drivers installing ETC equipment -- now on board a record 25.5 million vehicles, but still only a third of all those on the road -- economists say the growth in highway travel may be sustained, fuelling demand for gasoline.

"I wouldn't be surprised if ETC-equipped cars increase consumption by 100 litres a year," said Tomomichi Akuta, senior economist at Mitsubishi UFJ Research and Consulting.

"If 20 million of those cars did that, it would amount to 2 million kilolitres (34,500 bpd) a year, equal to around 3 percent of Japan's annual gasoline consumption. I think highway toll discounts are going to help the nation's gasoline consumption stop its decline or even increase this fiscal year."

Gasoline demand fell 4.2 percent last year, the sharpest decline on record, to below 1 million bpd, from a peak of 1.06 million bpd in 2004/05, battered by record prices last summer.

But if overall highway use increases 10 percent this year, highway gasoline consumption will rise by around 1 percentage point of overall demand, according to Reuters calculations.

This would shave a full percentage point off the government's forecast in March for a 3 percent decline in gasoline demand, which did not take into account the discounted tolls, and boost total demand back towards its peak of four years ago.

Even a 50,000 bpd rise in Japan's gasoline demand is unlikely to change sentiment in a global oil market of 86 million bpd, analysts noted, with the far bigger question how quickly the pump-priming measures can pull the economy out of its deepest recession since World War Two -- restoring truck traffic as well.

The government struck a bullish note in late May when it said the pace of economic worsening was slowing and a rebound in global demand could mean the last quarter's record 4 percent contraction was the worst during the recession.

"Even if highway (gasoline) consumption increases by 1 percentage point, that could be offset by a worse-than-projected economic situation," said Hidetoshi Shioda, senior analyst at Mizuho Securities in Tokyo. ($1=96.56 yen)

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