Direct hit from the Middle East war… Japanese stocks, the yen and JGB prices in a 'triple slump'

As the war between the United States/Israel and Iran drags on, Japan is seeing an accelerating “triple slump,” with stock prices, the yen’s value and government bond prices all falling. Analysts say losses are mounting because Japan depends on the Middle East for about 95% of its crude oil imports.

On the 30th in Tokyo stock trading, the Nikkei index logged 50,936 at the morning close, down 4.57% from the previous session. A month after the war began, there are no signs of it being brought under control, and the situation is instead deteriorating. The Nikkei said, “As crude prices continue to soar, they are beginning to cast a shadow over corporate earnings.”

The Nikkei had been rising steadily since the launch of the Sanae Takaichi cabinet in October last year, on expectations for “Sanaenomics,” which pledged aggressive fiscal spending. In February it surged to a record high of 58,850, raising hopes of breaking 60,000, but it is now in danger of falling below 50,000.

At the morning close, Toyota Motor, Japan’s top company by market capitalization, fell more than 6%. SoftBank Group (SBG) plunged over 9% on worries of overheating in artificial intelligence (AI) plays. Masahiro Suzuki, an analyst at Daiwa Securities, said, “Expected earnings are being revised down first for materials companies directly affected by rising oil prices,” adding, “There is a possibility that downward revisions will spread across manufacturing.”

The yen is also weakening. In Tokyo FX trading, the yen-dollar rate at one point rose to the mid-¥160s per dollar (meaning the yen’s value fell), hitting its highest level in 1 year and 8 months. While the dollar is strong on continued “buy dollars in times of crisis” flows amid worsening Middle East tensions, expectations that higher oil prices will widen Japan’s trade deficit are fanning yen weakness.

Markets are increasingly betting that Japan could step in with yen-buying intervention. Atsushi Mimura, vice finance minister for international affairs at Japan’s Ministry of Finance, said of the weak yen that day, “If this situation continues, decisive action may now be necessary.” It was the first time since taking office in July 2024 that Mimura used the phrase “decisive action.” He warned, “We are hearing that speculative moves are growing not only in the crude oil futures market but also in the FX market.”

Japan’s long-term interest-rate benchmark, the 10-year JGB yield, is surging (bond prices are plunging). The 10-year yield briefly climbed to 2.39%, the highest since February 1999—about 27 years. Concerns over inflation driven by higher oil prices and growing expectations that the Bank of Japan will raise its policy rate sooner than expected have fueled bond selling.

The BOJ’s recent re-estimate of the “output gap” (demand minus supply capacity) also lends support to the case for an earlier rate hike, showing the economy has been in a “demand-exceeds-supply” state since about four years ago. Markets are now talking about the BOJ raising rates again as early as April.

Earlier, Japan’s Cabinet Office released an estimate that rising import resource prices could have a negative impact of up to ¥15 trillion on the Japanese economy. The calculation suggests that if resource prices rise 50% year on year, Japan’s costs increase by ¥9 trillion, or about 1.4% of gross domestic product (GDP). If resource prices jump 80%, costs rise to ¥15 trillion, or roughly 2.3% of GDP.

Tokyo = Il-gyu Kim, correspondent black0419@hankyung.com