Japan's economy braces for lasting oil shock after US-Iran accord
An easing in Middle East tensions may not spare Japan from costlier imports, delayed logistics and a possible slide towards near-zero growth.
- Despite a US-Iran accord, Japan faces sustained price increases as crude oil and naphtha purchased at elevated prices continue to filter through the domestic economy.
- The restoration of energy supplies is expected to be slow, hampered by the time required to repair disrupted logistics networks, secure the Strait of Hormuz, and restore damaged oil facilities.
- The oil shock has already pushed Japan's trade balance into a deficit and weakened economic confidence, with forecasts predicting near-zero growth and a risk of recession if geopolitical tensions re-escalate.
Japan is still expected to feel the economic aftershocks of the Middle East crisis, even after the United States and Iran agreed to a memorandum aimed at ending their hostilities.
The immediate geopolitical threat has eased, but crude oil and naphtha bought at elevated prices are likely to keep feeding through to domestic costs, while the repair of disrupted logistics networks could leave a longer mark.
Uncertainty also remains, as the situation could still turn depending on how future US-Iran negotiations proceed.
The economy entered the crisis with momentum.
Real gross domestic product grew at an annualised 1.8 per cent in the January-March quarter of 2026 from the previous quarter, before the full consequences of the regional tensions were felt.
That strength was quickly undermined when the Strait of Hormuz was effectively shut, sending crude prices higher and raising procurement concerns.
Corporate sentiment and consumer confidence then weakened rapidly.
The deterioration was reflected in Japan’s May Economy Watchers Survey, which tracks people working in sectors sensitive to shifts in economic conditions.
Its outlook diffusion index for the next two to three months stood at 40.7, far below the 50 line separating expansion from contraction.
Price pressure was already broader at the corporate level, with the producer price index rising 6.3 per cent from a year earlier in May as increases spread to petroleum and coal products as well as chemicals.
Consumer inflation has risen more slowly.
The core consumer price index, excluding fresh food, was up 1.4 per cent year on year in May.
Hideo Kumano, chief economist at Daiichi Life Research Institute Co., Ltd., warned that the pass-through was not over: “Companies have yet to fully pass on higher crude oil costs, meaning that price increases will continue for a while, particularly further down the supply chain.”
Restoring energy flows is also expected to be difficult.
Kumano said ensuring safety in the Strait of Hormuz and removing mines would take time, while a tanker round trip to bring crude oil back to Japan would probably require around six weeks.
Iran’s oil-related facilities will also need to be restored, making a quick return to pre-conflict economic conditions unlikely.
Japan’s external accounts have already been hit.
The trade balance swung to a deficit of 378.6 billion yen in May, with expensive replacement purchases of crude oil and naphtha lifting the value of imports.
Although crude oil futures fell after the US-Iran agreement, they remain above pre-attack levels.
A further widening of the trade deficit could weigh on Japan’s economic growth.
SMBC Nikko Securities Inc. expects Japan to post almost no economic growth across the April-June and July-September quarters, even if prolonged instability in the Middle East is avoided.
The downside risk remains significant: observers say nuclear talks between the United States and Iran could falter, and a renewed rise in military tensions could push the Japanese economy into negative growth.
[Copyright The Jiji Press, Ltd.]
