A former Bank of Japan official, Nobuyasu Atago, who currently serves as the chief economist at Rakuten Securities Economic Research Institute, stated on Thursday that Japan's economy could face risks from supply shocks and declining demand resulting from the conflict involving Iran. He warned that the Bank of Japan might be overlooking these risks due to its focus on inflationary pressures.
Recent hawkish remarks from the Bank of Japan have led markets to widely anticipate a roughly 70% chance of an interest rate hike in April. This expectation stems from surging oil prices due to the Middle East conflict and a weak yen driving up import costs, which together are intensifying price pressures.
Although the Bank of Japan kept interest rates unchanged in March, policymakers continue to debate the possibility of further rate hikes. Some are concerned that the central bank may be too slow in responding to inflation risks.
Atago cautioned that expected shortages of naphtha and other chemical products generated during oil refining could pose even greater risks and potentially harm the economy.
"Similar to a natural disaster, what we need to consider in facing this crisis is the significant disruption to the flow of goods, rather than worrying about how high prices might rise," Atago said.
"The Bank of Japan should focus not on whether to raise rates in April, but on how to inject liquidity into the market to prevent an economic downturn and avoid bankruptcies among some businesses."
Since the United States and Israel launched strikes against Iran, markets have remained volatile. The conflict has effectively disrupted the Strait of Hormuz, a passage for approximately one-fifth of global oil and natural gas shipments, leading to higher crude oil prices.
On Thursday, U.S. President Donald Trump vowed to launch stronger strikes against Iran, dampening hopes for a swift end to the conflict and worsening the predicament for countries like Japan, which rely heavily on oil and naphtha imports from the Middle East.
The majority of naphtha consumption occurs in the petrochemical sector, where it is cracked in steam crackers to produce ethylene and propylene—key raw materials for plastics, synthetic fibers, and other products.
Atago indicated that a naphtha shortage would reduce factory output, and the damage to the overall economy would intensify starting this quarter.
He pointed out that although government data show Japanese manufacturers expect a 3.8% increase in production for March, actual output may decline because the forecast does not account for the impact of the conflict.
He added that any government-imposed restrictions on economic activity aimed at curbing fuel consumption could also reduce demand during Japan's tourist season, which begins in May.
"Japan may experience stagflation this summer, with soaring prices alongside an economic downturn," Atago said.
He also mentioned that the Bank of Japan is likely using its nationwide branch network to gather information on the operations of petrochemical companies. This information may be reflected in the regional economic report to be released on Monday.
However, he noted that such data may not be sufficient to convince hawkish Bank of Japan policymakers to change their stance.
"In times like these, policymakers need to listen to businesses and people at the grassroots level. But institutions like the Bank of Japan, which are composed of economists accustomed to studying macroeconomic data, are not adept at listening to the public," Atago said.
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