TOKYO, April 2 - A former central bank official warned on Thursday that Japan faces the prospect of severe supply disruptions and weakening domestic demand stemming from the ongoing Iran war, risks he believes the Bank of Japan (BOJ) may be neglecting as it focuses on inflationary trends.
Nobuyasu Atago, who is now chief economist at the Rakuten Securities Economic Research Institute, said recent hawkish signals from the BOJ have prompted markets to assign roughly a 70% probability to a rate increase in April. Those market expectations have been reinforced as oil prices climb amid the Middle East conflict and the weak yen lifts import costs, increasing price pressures.
BOJ policymakers left rates unchanged in March but reportedly debated further tightening, with some expressing concern that the central bank could be lagging in its response to inflation risks. Atago argued the BOJ may be misprioritizing the threat. He warned that an anticipated shortage of naphtha and other chemical products produced during the oil-refining process could represent a more acute danger to the economy.
"Just like a natural disaster, for this crisis one needs to think about a huge disruption to the flow of goods, rather than fretting how high prices might rise,"
Atago said. He added that the central bank should plan not merely for the timing of a rate move but for interventions to support markets should economic conditions deteriorate.
"What the BOJ needs to contemplate is not whether to raise rates in April, but how to pump liquidity into the market in case the economy tanks and threatens to push some firms under."
Markets have been unsettled since what the article describes as the U.S.-Israeli war on Iran effectively closed the Strait of Hormuz, a conduit for about one-fifth of global oil and gas shipments. That development has driven crude oil prices higher, compounding import-cost pressures for energy-dependent economies such as Japan.
The former central banker warned that naphtha - and related petrochemical feedstocks produced by refineries - are essential inputs for steam crackers that generate ethylene and propylene. These olefins are described as core building blocks for plastics, synthetic fibres and other industrial products. A shortfall in naphtha supply, Atago said, would depress factory output and could deepen economic damage beginning in the current quarter.
Atago noted a mismatch between government survey expectations and likely real-world output: while official data indicated manufacturers anticipated a 3.8% rise in output in March, he suggested actual production will probably decline because that estimate did not factor in the conflict's effects.
He also flagged the potential for government measures to restrict economic activity to conserve fuel. Any such policy, he said, could further blunt demand during Japan’s peak travel season, which the article notes starts in May.
"Japan may suffer stagflation this summer with prices spiking and the economy slumping at the same time,"
Atago said.
The BOJ is likely gathering intelligence from its nationwide branch offices on how petrochemical plant operators are managing the situation, he added, and that information may surface in a regional-economies report due on Monday. Still, he cautioned that such operational data might not persuade hawkish policymakers at the BOJ to alter their stance.
"In times like this, policymakers need to listen to companies and people on the ground,"
Atago said.
"But that’s not something an institution like the BOJ, made up of economists accustomed to looking at macro data, is very good at."
Summary
A former BOJ official warns that the Iran war could trigger naphtha and petrochemical shortages that damage Japanese factory output and consumer demand, producing stagflation risks. He urges the BOJ to prioritize contingency liquidity provision over the timing of rate hikes.
Key points
- Markets price about a 70% chance of a BOJ rate rise in April amid higher oil prices and a weaker yen that increase import-driven inflation.
- Shortages of naphtha and refinery-derived chemicals would directly affect petrochemical production, reducing factory output and extending economic damage from the current quarter.
- Potential government restrictions to conserve fuel could further reduce demand during Japan's peak travel season beginning in May.
Risks and uncertainties
- Supply-chain shock: Disruptions to oil and naphtha flows through the Strait of Hormuz could reduce petrochemical feedstock availability, hitting manufacturing sectors that rely on ethylene and propylene.
- Demand shock: Measures to curb fuel use or broader economic weakness could depress domestic demand, particularly affecting travel and manufacturing sectors.
- Policy mismatch: The BOJ's focus on inflation and macro data could leave it ill-equipped to respond with targeted liquidity support should firms face cash-flow stress from supply disruptions.