Israel-Palestinian conflict tests Japan's oil diplomacy

By John Geddie, Yoshifumi Takemoto and Tim Kelly

TOKYO (Reuters) -As Tokyo scrambled to respond to Hamas attacks on Israel this month, Japanese officials found themselves debating a perennial fear: what does it mean for the resource-poor nation's oil lifeline from the Middle East?

Concerns about energy security, as well as Japan's diverse diplomatic interests in the region, explain why Tokyo initially struck a more neutral tone on the crisis than other Group of Seven (G7) industrialised nations, three government sources with knowledge of the matter said.

While Japan has since adopted bolder rhetoric, its hesitancy may also complicate how Japan brokers a unified stance with its G7 peers, officials and analysts said, as it prepares to host a meeting of the group's foreign ministers in Tokyo next month, where the spiralling conflict is expected to dominate.

"The situation on the ground is changing minute-by-minute. Japan has been expressing its stance in response to the latest situation each time," Japan's Foreign Minister Yoko Kamikawa told a press conference on Wednesday, in response to a Reuters' question on whether Tokyo's response had been more restrained than its peers.

"Peace and stability in the region is highly important for (Japan’s) energy security. From this viewpoint, Japan is closely watching the situation with serious concern," she added when asked about Japan's oil dependence on the Middle East, which supplies more than 90% of its needs.

After Hamas gunmen rampaged through Israeli towns on Oct. 7, Israel has responded with bombardments of the Hamas-ruled Gaza enclave, raising the risk of a broader regional war involving Iran, its Lebanese ally Hezbollah and Syria.

While the conflict has had little impact on global oil and gas supplies as of yet, and Israel is not a significant producer, investors and market observers are assessing how it could escalate and what it might mean for supplies from nearby countries in the world's top oil producing region.

'WALKING A FINE LINE'

In the immediate aftermath of the Hamas assault, Japan issued statements condemning the attacks and saying it was concerned by Israeli air attacks in the Gaza Strip.

Japan did not refer to the Hamas attacks as "terrorism" or reference Israel's right to defend itself - language that had been used by its G7 peers - until Oct. 11.

Prime Minister Fumio Kishida was also not among the five G7 leaders who signed a statement on the crisis on Oct. 9, prompting questions over the unity of the group's response.

G7 finance ministers, who were meeting in Morocco as events escalated, issued a brief statement on the attacks on Oct. 12.

A government official involved in negotiating that statement, speaking on condition of anonymity, said Japan had been eager to steer clear of any language that could have been seen as provocative.

Japan was "standing one step behind the United States and some European countries", added Isamu Nakashima, associate research fellow at the Middle East Institute of Japan.

For decades, Japan has tried to steer a neutral course through the Israeli-Palestinian dispute by calling for a negotiated settlement, although it has criticised Israel for allowing the construction of settlements outside the country's 1967 border.

For Tokyo, this approach has been driven by painful memories of the 1973 oil crisis, when Middle East producers issued an embargo targeted at nations, including Japan, that supported Israel during its war with Arab states.

Energy-poor Japan, unlike the U.S., has since attempted to pursue cordial ties with both Saudi Arabia and Iran, the region's key rivals and major oil producers.

"The through line of Japan's Middle East policy has been maintaining the flow of energy imports from the region," said David Boling, a director at consulting firm Eurasia Group.

"Tokyo will fret over how to respond to this crisis, for fear of somehow jeopardizing that lifeline."

A U.S. official, speaking on condition of anonymity, said there was "some gap" between Tokyo and Washington's position on the crisis and that Japan was "walking a fine line" in responding to events while maintaining its interests in the region.

While the United States is Japan's closest ally, when it comes to the Middle East, Tokyo will be very wary of being seen as its proxy, said Shuji Hosaka, board member of the Institute of Energy Economics Japan.

"In the eyes of ordinary people in Arab countries, Japan may be following the U.S. footsteps, and that could bring about some consequences for Japan," said Hosaka.

(Reporting by John Geddie, Yoshifumi Takemoto, Tim Kelly, Tetsushi Kajimoto, Ekaterina Golubkova, Kiyoshi Takenaka and Kentaro Sugiyama in Tokyo; Editing by Alex Richardson)