CAPITAL: Tokyo

MONETARY UNIT: Yen

REFINING CAPACITY: 5 million b/cd

OIL PRODUCTION: 14,000 b/d

OIL RESERVES: 60 million bbl

GAS RESERVES: 1 tcf

Even before a regional currency crisis braked Asia`s growth in economic activity and energy demand, Japan`s refiners and marketers were struggling. A key 1996 step in the country`s long process of deregulation confronted them with the need to make massive cuts in their staffs and operations.

The legal step creating the problems was the government`s refusal to renew the 10-year-old Provisional Law on the Importation of Specific Petroleum Products, which banned product imports by nonrefiners. When the protectionist measure lapsed, retail product prices collapsed.

The price jolt hit Japanese oil companies in what had been their most profitable operating sector. And through most of 1997 they remained subject to an effective ban on product exports.

An estimated 40% of Japan`s 60,000 service stations regularly posted losses, and most of the remainder operated on very small profit margins. Before deregulation, oil companies could afford to subsidize low-volume, overstaffed service stations with the gross profits they earned in a market protected from international competition. While the protections remained in force, Japanese consumers paid very high prices for oil products.

Most Japanese companies were trying to cut staff levels in 1997. But further adjustments were likely.

A study by Esso Sekiyu estimated that 40% of Japan`s service stations would have to close within 5 years due to price competition. Of 38,000 service stations it surveyed in 28 prefectures, 75% were likely to lose money with gasoline prices at then-prevalent levels.

The study expected gasoline prices to stabilize when about one third of Japan`s service stations had closed.

Another government move expected as early as second-quarter 1998 was lifting of a ban on self-service stations. The change was likely to stimulate building of stations of that type and drop gasoline prices by about 10%. The Ministry of Industry and Trade (MITI) expected self-serve outlets to represent about 10% of Japan`s total in the first year in which they were allowed.

In 1997 the government eased out its requirement that service station operators secure gasoline purchase certificates from a supplier. The requirement had kept supermarkets and other possible discounters out of the market because suppliers, fearing price-discounting by high-volume retailers, wouldn`t issue them the certificates.

MITI also required wholesalers to publish product prices, a move than enabled service stations to shop for supplies.