Japan warns that war-driven oil price surge could trigger sustained inflation

Investing.com – The Japanese government warned on Friday that rising oil prices due to the Middle East crisis could exert persistent inflationary pressure on the economy in the coming quarters.

The Cabinet Office forecast in its March economic report that a sustained 10% increase in crude oil prices could raise Japan’s consumer inflation rate by as much as 0.3 percentage points over approximately one year.

The government maintains its cautiously optimistic outlook, believing that the world’s fourth-largest economy is generally experiencing moderate recovery, while noting that attention should be paid to the impact of the Middle East crisis on the economy.

For the first time since mentioning the impact of U.S. trade policy in April 2025, the Cabinet Office has removed relevant wording from its headline assessment.

Regarding prices, the government has changed its previous view of consumer prices rising at a slower pace to a moderate increase.

Other assessments remain unchanged, including that private consumption is recovering and corporate investment is rebounding moderately.

The Cabinet Office pointed out that the deterioration in consumer confidence data and production cuts by petrochemical manufacturers are trends worth noting.

Thanks to corporate and consumer spending, Japan’s economy grew at an annual rate of 1.3% in the October to December quarter. Prime Minister Fumio Kishida’s government has implemented measures ranging from releasing oil reserves to fuel subsidies to cushion the impact on households and businesses.

The Bank of Japan has kept interest rates unchanged at 0.75% during its January and March meetings. The central bank released a new consumer price index on Thursday, which analysts say is meant to show that underlying inflation is moving in the direction of an impending interest rate hike.

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