Japan’s economic outlook is under fresh pressure after a surge in oil prices linked to intensified strikes between Iran and Israel, analysts warned on Monday. The jump in crude - which rose 7% to its highest levels in months - has elevated the risk that a prolonged Middle East conflict would leave the import-dependent economy grappling with the twin problems of slower growth and higher inflation.
Officials in Tokyo have moved to assess potential fallout. Prime Minister Sanae Takaichi told reporters on Saturday that she had instructed her cabinet to produce estimates of the economic impact from the weekend strikes on Iran. The scale of the damage, government officials and analysts say, will hinge on whether disruption to shipments from the Middle East proves persistent.
Japan sources more than 90% of its crude oil from the Middle East. Shipping companies in the country reported on Sunday that they were suspending operations around the Strait of Hormuz after the United States and Israel launched military strikes on Iran. While Japan retains roughly three months' worth of oil in reserve, a prolonged spike in crude prices or an effective blockade of the Strait could push up costs across a range of goods and services and further weaken already soft household spending.
"We hope to take necessary steps flexibly to minimise the impact on people’s livelihoods and economic activity," Takaichi told parliament when questioned about the government's response.
The combination of sluggish demand and rising prices - a near-definition of stagflationary pressure - would complicate the Bank of Japan's efforts to continue lifting interest rates from historically low levels. Before the weekend escalation in the Middle East, markets had priced in the possibility of a rate increase as soon as April. Now, several analysts say, the BOJ may move more cautiously.
Analysts at Morgan Stanley MUFG Securities calculated that a 10% increase in oil prices would trim about 0.1 percentage point from Japan's real gross domestic product. Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities, said a sharp rise in oil prices would create short-term stagflationary risks even as underlying inflation was likely to decelerate over the longer term. "The BOJ is likely to adopt a more cautious stance, further reducing the probability of a near-term rate hike," he said.
Similarly cautious estimates came from Nomura Research Institute. The institute expects that, if military conflict leads to a sustained disruption of operations around the Strait of Hormuz, Japan's real GDP could be pushed down by 0.18 percentage point while inflation could rise by 0.31 percentage point. Takahide Kiuchi, a former BOJ board member now at Nomura Research Institute, said that escalating downside risks to the economy mean the BOJ might need to be more cautious about additional rate hikes.
At the central bank, officials have continued to stress that policy will respond to underlying inflation. In a speech on Monday, BOJ Deputy Governor Ryozo Himino said the central bank is expected to continue raising interest rates as underlying inflation approaches the 2% target, but he did not offer specifics on the pace or timing of future hikes.
Macro data before the recent tensions already painted a mixed picture. Japan's economy expanded at an annualised 0.2% pace in the final quarter of last year, but rising living costs have been weighing on consumption. Analysts nonetheless expect growth to pick up as moderating food inflation and government fuel subsidies ease pressures on households and push real wages into positive territory.
Investment considerations and data-driven approaches were also highlighted in the coverage, noting that disciplined analysis and high-quality data can help investors identify opportunities amid uncertainty. Longer-term investment choices will depend on how inflation and growth evolve if oil market disruptions persist.