Kiuchi: closely watching crude oil, financial capital markets

Kiuchi: closely watching crude oil, financial capital markets

Japan’s economic outlook faces heightened uncertainty as escalating tensions in the Middle East drive crude oil prices to multi-month highs, prompting close scrutiny from policymakers and analysts. With over 90% of its crude oil imports sourced from the Middle East, Japan is particularly vulnerable to disruptions in shipments through the Strait of Hormuz, which has been effectively halted by recent military strikes involving the U.S., Israel, and Iran. Takahide Kiuchi, a former Bank of Japan (BOJ) board member and economist at Nomura Research Institute, has outlined three scenarios to assess the potential economic fallout. In a base-case projection, a prolonged conflict could push oil prices to $87 per barrel, reducing Japan's real GDP by 0.18% and lifting inflation by 0.31%. A worst-case scenario—where Iran fully blocks the Strait for a year—could see oil prices surge to $140 per barrel, mirroring 2008 levels and increasing stagflation risks.

The BOJ, already navigating a delicate balance between weak domestic demand and inflationary pressures, may adopt a more cautious stance, delaying rate hikes previously anticipated as early as April 2026. Morgan Stanley MUFG Securities estimates that a 10% oil price increase could shave 0.1 percentage points off Japan's GDP. Kiuchi emphasizes that the central bank's policy trajectory will depend on the duration of supply disruptions and their impact on consumption and corporate margins. Meanwhile, the Japanese government is reportedly evaluating emergency measures, including potential tax cuts or subsidies, to mitigate rising living costs. As global financial markets remain volatile, Japan's reliance on imported energy underscores the need for coordinated fiscal and monetary responses to stabilize growth.