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▼ Japan’s Economy Is Particularly Vulnerable Amid Middle East Conflict
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Japan is heavily exposed to turmoil in the Middle East despite being far away and removed from the hostilities, and the crisis is coming at a time when Japan is vulnerable and in no position to absorb shocks that emanate from the conflict.
According to the Petroleum Association of Japan, about three-quarters of the country's crude oil imports are shipped via the Strait of Hormuz, a choke point between the Persian Gulf and the Gulf of Oman with Iran on one shore.
Iran, which is currently in a military conflict with Israel, has threatened to close the strategic passage.
“A large portion of crude oil and gas is transported through this strait, so any disruption would hinder energy procurement and cause prices to increase sharply," said Yuki Togano, a researcher at the Japan Research Institute.
The price of oil is already up about 10% since the conflict began on June 13 — when Israel started destroying Iran's nuclear capabilities — with Brent crude oil futures now trading at about $77 a barrel.
Tagano said that if the Strait of Hormuz is closed, the price could jump to $140 a barrel. Takahide Kiuchi, executive economist at Nomura Research Institute, wrote in a recent report that the price of crude could climb to around $120 a barrel.
"This time, Iran’s regime might possibly collapse. Blocking the Strait of Hormuz might anger China and Middle Eastern nations, but when facing a situation where the regime itself could collapse, it's natural to put every possible measure on the table,” Togano said.
According to a report by Zero Carbon Analytics, a research group, Japan is the most vulnerable of the large Asian economies to the disruption of petroleum shipments through the Strait of Hormuz due to its high reliance on Middle East oil.
Prime Minister Shigeru Ishiba said on Thursday that the government will implement additional measures from June 26 to prevent gasoline prices from rising above about ¥175 per liter. The average price on Monday was ¥171.2 per liter.
Togano said that although measures to contain price increases are important, Japan needs to strengthen policies, including those related to saving energy, to contain fundamental risks arising from reliance on oil imports from the Middle East.
Japan is already facing a number of significant economic challenges. The trade war with the United States is affecting exports and threatening auto sales, which are important to the Japanese economy.
Inflation is also a problem. It is high and squeezing households, which are struggling to make ends meet as wages fail to keep up with price increases. Rising food prices are particularly worrying.
Japan’s inflation in May was 3.5%, with the price of rice having more than doubled.
If the Middle East conflict continues to push up oil prices, the yen is expected to decline as dollar-buying must increase to pay for energy imports.
Even though the yen is traditionally seen as a safe-haven asset, the dollar seems to be attracting higher demand for those seeking a refuge from turmoil, Tsuyoshi Ueno, an economist at NLI Research Institute, wrote in a report on Thursday.
On Friday, the yen traded at ¥145.3 to the dollar, from about ¥143.5 when the conflict began.
Ueno points out that the yen weakened significantly after Russia invaded Ukraine in February 2022 and oil prices increased.
“If the heightened tensions in the Middle East continue for a long time and oil prices rise and remain high, it will likely become a major factor for the yen’s depreciation.”
According to the Petroleum Association of Japan, about three-quarters of the country's crude oil imports are shipped via the Strait of Hormuz, a choke point between the Persian Gulf and the Gulf of Oman with Iran on one shore.
Iran, which is currently in a military conflict with Israel, has threatened to close the strategic passage.
“A large portion of crude oil and gas is transported through this strait, so any disruption would hinder energy procurement and cause prices to increase sharply," said Yuki Togano, a researcher at the Japan Research Institute.
The price of oil is already up about 10% since the conflict began on June 13 — when Israel started destroying Iran's nuclear capabilities — with Brent crude oil futures now trading at about $77 a barrel.
Tagano said that if the Strait of Hormuz is closed, the price could jump to $140 a barrel. Takahide Kiuchi, executive economist at Nomura Research Institute, wrote in a recent report that the price of crude could climb to around $120 a barrel.
"This time, Iran’s regime might possibly collapse. Blocking the Strait of Hormuz might anger China and Middle Eastern nations, but when facing a situation where the regime itself could collapse, it's natural to put every possible measure on the table,” Togano said.
According to a report by Zero Carbon Analytics, a research group, Japan is the most vulnerable of the large Asian economies to the disruption of petroleum shipments through the Strait of Hormuz due to its high reliance on Middle East oil.
Prime Minister Shigeru Ishiba said on Thursday that the government will implement additional measures from June 26 to prevent gasoline prices from rising above about ¥175 per liter. The average price on Monday was ¥171.2 per liter.
Togano said that although measures to contain price increases are important, Japan needs to strengthen policies, including those related to saving energy, to contain fundamental risks arising from reliance on oil imports from the Middle East.
Japan is already facing a number of significant economic challenges. The trade war with the United States is affecting exports and threatening auto sales, which are important to the Japanese economy.
Inflation is also a problem. It is high and squeezing households, which are struggling to make ends meet as wages fail to keep up with price increases. Rising food prices are particularly worrying.
Japan’s inflation in May was 3.5%, with the price of rice having more than doubled.
If the Middle East conflict continues to push up oil prices, the yen is expected to decline as dollar-buying must increase to pay for energy imports.
Even though the yen is traditionally seen as a safe-haven asset, the dollar seems to be attracting higher demand for those seeking a refuge from turmoil, Tsuyoshi Ueno, an economist at NLI Research Institute, wrote in a report on Thursday.
On Friday, the yen traded at ¥145.3 to the dollar, from about ¥143.5 when the conflict began.
Ueno points out that the yen weakened significantly after Russia invaded Ukraine in February 2022 and oil prices increased.
“If the heightened tensions in the Middle East continue for a long time and oil prices rise and remain high, it will likely become a major factor for the yen’s depreciation.”
- 20/6 22:03
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