Rising oil prices and a weakening yen risk pushing Japan into stagflation.

Rising oil prices and a weakening yen risk pushing Japan into stagflation, while the government may have to increase spending to prop up the economy.

March 9, 2569 at 08.31:XNUMX a.m. Bloomberg reported that Rising oil prices, coupled with a weakening yen, are increasing the risk of the Japanese economy entering a state of stagflation, or a period of economic slowdown accompanied by high inflation. This could force the government to increase economic stimulus measures, while simultaneously complicating the Bank of Japan's (BOJ) task of normalizing monetary policy.

Crude oil prices surged above $100 per barrel on Monday amid escalating tensions in the Middle East and concerns about the security of global energy transport routes and infrastructure. Meanwhile, the yen weakened against the dollar, nearing 160 yen per dollar, the level at which Japanese authorities intervened in the market in 2567 to support the currency.

In the financial markets, the Nikkei 225 index fell about 6.9% in early trading on Monday, as long-term bond yields rose, reflecting investor concerns about the economic outlook.

Japan imports almost all of its energy, making its economy and inflation highly sensitive to fluctuations in oil prices. The current situation presents a dual pressure: rising oil prices and a weakening yen, both driving up import costs and domestic prices.

These concerns arise ahead of Tuesday's economic data release, which is expected to confirm that private consumption barely expanded in the fourth quarter as households remained cautious about spending amid rising living costs.

The cost of living remains a political pressure point in Japan, despite Prime Minister Sanae Takaichi's landslide victory in last month's election. This was partly driven by expectations that her expansionary fiscal policies would alleviate the burden on households, following four consecutive years of inflation exceeding the Bank of Japan's target. However, if inflationary pressures increase further, the government may need to implement more aggressive fiscal policies.

Yuichi Kodama, Chief Economist of Meiji Yasuda Research Institute. specify that This situation represents a "double blow" for Japan, as soaring oil prices coupled with a weakening yen will put significant pressure on the economy and clearly increase the risk of stagflation.

However, he stated that: important factor คือ The period in which oil prices remain high. If the situation drags on, the government may need to introduce a new stimulus package, but increased government spending could raise concerns about Japan's fiscal stability, which previously triggered heavy selling in bond markets in January.

Japan relies heavily on oil imports from the Middle East. Data from the Japanese Ministry of Trade and Commerce indicates that around 90% of its oil imports come from the Middle East, rising to 95.1% in January. The majority of this oil is transported through the Strait of Hormuz.

On Monday, Brent crude oil prices surged up to about 20%, reaching approximately $111 per barrel, following a 28% increase the previous week. Meanwhile, the yen weakened to around 158.71 yen per dollar as investors flocked to hold dollars amid risk-averse market sentiment.

Kodama anticipates that the current economic and financial market situation may cause the Bank of Japan to slow down interest rate hikes in the near future, in order to assess the significant impact of the conflict in Iran on the economy.

"The BOJ is in a very difficult situation." Kodama said. "Central banks want to raise interest rates during favorable economic conditions, but the situation in the Middle East could become a significant drag on the economy."

Meanwhile, economic figures to be released on Tuesday are expected to show Japan's GDP expanding by 1% in the final quarter of 2025 on a year-on-year basis, after contracting by 2.6% in the previous quarter, reflecting a still fragile recovery.

refer : www.bloomberg.com

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