Japan Economy Bears Lasting Scars Even as Middle East Tensions Ease

Tokyo, June 21 (Jiji Press)–While geopolitical risks surrounding the Middle East have eased for now following the U.S.-Iran agreement on a memorandum to end their hostilities, the impact on prices in Japan from crude oil and naphtha the country procured at elevated costs is expected to continue for some time. Also, normalization of logistics networks is expected to take time, leaving lasting scars on Japan’s economy. Uncertainty has not been eliminated, as developments could still reverse depending on future negotiations between the United States and Iran. Before the full impact of Middle East tensions emerged, Japan’s real gross domestic product in the January-March quarter of 2026 maintained positive growth from the previous quarter, expanding at an annualized rate of 1.8 pct. However, a de facto closure of the Strait of Hormuz led to a surge in crude oil prices and heightened procurement concerns, rapidly dampening corporate sentiment and consumer confidence. In Japan’s May survey of so-called economy watchers, or people working in industries sensitive to changes in economic trends, the outlook diffusion index for the next two to three months came to 40.7, well below the 50 threshold separating expansion from contraction. Meanwhile, Japan’s producer price index, which measures the costs of goods traded between companies, jumped 6.3 pct in May from a year earlier, with price hikes spreading to petroleum and coal products as well as chemical products. While the country’s core consumer price index, excluding fresh food prices, for the same month rose a more modest 1.4 pct year on year, Hideo Kumano, chief economist at Daiichi Life Research Institute Co., said, “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.” The path to restoring logistics is also unlikely to be smooth. Kumano said that securing safety in the Strait of Hormuz and clearing mines will take time, and that it will likely take around six weeks for tankers to make a round trip to bring crude oil back to Japan. Restoration of Iran’s oil-related facilities will also be required, with the economic environment unlikely to quickly return to pre-conflict conditions. Japan’s trade balance for May swung to a deficit of 378.6 billion yen, as costly replacement purchases of crude oil and naphtha boosted the value of imports. Although crude oil futures prices fell following the U.S.-Iran agreement, they remain above pre-attack levels, and a continued expansion of the trade deficit could weigh on Japan’s economic growth. SMBC Nikko Securities Inc. forecasts that even if prolonged instability in the Middle East is avoided, Japan will be forced to record near-zero economic growth between the April-June and July-September quarters. Observers say there is also a possibility that talks on nuclear issues between the United States and Iran could falter, and a resurgence of military tensions could push the Japanese economy into negative growth. END [Copyright The Jiji Press, Ltd.]