Japan faces growth risks, slower BOJ rate hikes from Iran conflict

TOKYO, March 2 : Japan faces risks of low growth and high inflation if a prolonged Middle East conflict keeps oil prices elevated and hits the import-reliant economy, analysts say, complicating the central bank’s efforts to push up still-low interest rates.

Oil prices jumped 7 per cent to their highest in months on Monday as Iran and Israel stepped up attacks in the Middle East, disrupting shipments from the key producing region in a blow to Japan that imports over 90 per cent of its crude oil from the Middle East.

Prime Minister Sanae Takaichi told reporters on Saturday that she has instructed her cabinet to produce estimates on the potential economic impact from the weekend strikes on Iran.

Given Japan’s reliance on oil imports, the degree of damage to its economy will depend on whether the conflict leads to a prolonged disruption in shipments from the Middle East.

Japanese shipping firms said on Sunday they were halting operations around the Strait of Hormuz after U.S. and Israel launched military strikes on Iran.

While Japan has three months’ worth of oil reserves, a spike in crude prices or a blockade of the Strait could hurt already soft consumption by pushing up prices for a range of goods and services.

The mix of soft demand and rising inflation could put the Bank of Japan (BOJ) in a holding pattern, potentially delaying its next rate hike that markets had bet could come as soon as April before the weekend crisis, analysts say.

Morgan Stanley MUFG Securities estimates a 10 per cent increase in oil prices to shave around 0.1 per cent point off Japan’s real gross domestic product (GDP).

“A sharp rise in oil prices would pose short-term stagflationary risks, while underlying inflation is likely to decelerate over the longer term,” said Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities.

“The BOJ is likely to adopt a more cautious stance, further reducing the probability of a near-term rate hike,” he said.

Nomura Research Institute expects the conflict to push down Japan’s real GDP by 0.18 per cent point and push up inflation by 0.31 per cent if the military conflict leads to a prolonged disruption to operations around the Strait.

“Given escalating downside risks to the economy, the BOJ might need to be more cautious about additional rate hikes,” said Takahide Kiuchi, a former BOJ board member who is currently an economist at Nomura Research Institute.

Japan’s economy grew an annualised 0.2 per cent in the final quarter of last year with rising living costs weighing on consumption.

Analysts expect growth to accelerate as moderating food inflation and fuel subsidies ease the pain on households, turning real wages to positive territory.