Rising oil prices are undermining the foundation of the corporate earnings recovery in the Japanese stock market. As tensions with Iran continue to escalate, Brent crude prices have surged more than 50% above last year's average. Analysts warn that increasing energy costs will substantially erode the profits of Japanese companies.
On March 16, Bloomberg reported that Kazunori Tatebe, Chief Strategist at Daiwa Asset Management, pointed out that for every 10% increase in Brent crude prices, the overall net profit of Japanese companies declines by 1% to 2%.
Brent crude is currently trading around $104 per barrel. Since Japan relies almost entirely on imported oil, this price level poses a significant burden on its economy.
Shingo Ide, Chief Equity Strategist at NLI Research Institute, stated that investors had previously expected Japanese companies to achieve double-digit profit growth in the next fiscal year. However, with the sharp rise in oil prices, the market is reassessing its outlook. The most optimistic scenario now is single-digit growth, while the worst-case scenario involves an actual decline in profits.
Analysts note that this shift in expectations directly threatens the core logic that has driven the Topix index to a 15% gain over the past six months, outperforming major US and European markets.
The impact of oil prices is applying direct pressure on Japanese corporate earnings. Japan is one of the world's major economies most dependent on oil imports, making fluctuations in energy costs particularly impactful on corporate profits.
Calculations from Daiwa Asset Management indicate that a 10% rise in Brent crude prices leads to a corresponding 1% to 2% decline in the net profits of Japanese firms. With Brent crude currently around $104 per barrel—more than 50% higher than last year's average—corporate earnings are already under considerable strain.
Mamoru Shimode, a strategist at Resona Asset Management, warned that if the Iran conflict persists beyond April—when many Japanese companies will begin announcing their full-year results—corporate management may issue more conservative earnings forecasts, further dampening market sentiment.
It is worth noting that strong earnings expectations have been a key pillar supporting the Japanese stock market's rally over the past six months. During this period, the Topix index rose 15%, outperforming major indices in the US, Europe, and China. While expectations for fiscal stimulus and corporate reforms also contributed, profit growth prospects remained the most critical driver.
However, the persistent rise in oil prices is challenging this logic. Shingo Ide indicated that market expectations for double-digit profit growth in the next fiscal year are being revised downward toward single-digit growth or even profit declines.
In a report issued on Monday, Hikaru Yasuda and other strategists at SMBC Nikko Securities further noted that sectors expected to contribute significantly to profit growth in fiscal 2026—such as electronics, transportation equipment, and banking—could also face dual pressures from a softening US labor market and a slowdown in AI data center investment. If profits in these sectors decline, the overall earnings outlook for the Topix index faces further downward revision.
The impact of rising oil prices on Japanese companies extends beyond just raw material costs. Shingo Ide explained that not only are raw material prices increasing, but transportation costs are also set to rise. Furthermore, a global economic slowdown could suppress demand.
He added that Japan's real wages had just turned positive after 13 months of decline. If oil prices remain high, real wages could fall back into negative territory, making it difficult for a wide range of industries to remain unaffected.
This means the oil price shock will affect corporate profits through both cost increases and demand reduction, subsequently impacting household consumption capacity and creating broader economic pressures.
Despite the growing risk signals, some strategists maintain a cautiously optimistic view on the earnings outlook for Japanese companies. Shoji Hirakawa, Chief Global Strategist at Tokai Tokyo Intelligence Laboratory, pointed out that historically, significant stock market declines triggered by oil prices have typically occurred when crude prices doubled and were accompanied by simultaneous interest rate hikes by the US Federal Reserve.
He stated that with the current year-on-year increase in oil prices at around 50% and demand still robust, the upward trend in Japanese corporate profits is unlikely to reverse abruptly.
Nomura Securities predicts that if the year-on-year increase in crude oil prices remains within a range of 20% to 30% for the fiscal year ending March 2027, expectations for double-digit profit growth among Japanese companies could still be sustained.
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