Issue:
May 2026 | Deep Dive
A prolonged Iran war won’t necessarily crash markets, but firms and consumers will still pay a price
Is Japan, like the rest of the world, facing a Mayday disaster as the Middle East conflict and its consequences extend into May, threatening the global economy and financial markets with mayhem? Experts speaking at a Deep Dive event at the FCCJ on April 8 were hopeful that this dire scenario could be averted. But with hostilities now in their third month, the prospects are far from rosy.
Despite ongoing supply-side shocks to the global economy and finances caused by the blockade of the vital Strait of Hormuz, stock markets have continued to hit record highs. What is going on, and where is it all leading?
Paul Sheard, an Australian economist, Harvard scholar and former head of global economics and research at Standard & Poor's Rating Service, was joined by Hung Tran, a non-resident senior fellow at the Atlantic Council's GeoEconomics Center and former senior official at the Institute of International Finance and the IMF, and veteran Japan economist and analyst Jesper Koll.
The consensus that emerged was that while the threat of a major economic crisis or financial market crash is not imminent, a series of mini crises will slow global growth. The ability of governments to deal with this cascading threat will be limited by fiscal constraints - all of which could add up to eventual disaster.
Sheard pointed out that the conflict engulfing much of the Middle East is “Trump’s war” and has little support beyond, or even within, countries in the region, with the exception of Israel.
“Ultimately, the impact on the global economy on oil markets and financial markets will depend on how serious this gets or doesn't get, and how prolonged the conflict becomes,” Sheard said.
He continued: “Donald Trump is actually in the process of destroying his presidency and his legacy by initiating a war of choice and a war that should never have happened.” Even so, he added, ”I just don't see this [conflict] escalating and continuing from here too much.”
He was similarly sanguine about Japan’s ability to deal with the impact of the latest “oil shock”, recalling that in July 2008, oil prices hit an all-time peak close to $140, just before the global financial crisis really escalated. Currently, prices are much lower than that.
Japan and other economies, he said, “are much less energy intensive and oil intensive than they were in those days. Japanese industries such as petrochemicals, shipbuilding, aluminium and all kinds of energy-intensive heavy industries have been restructured and emerged in a more competitive state. Japan is still somewhat manufacturing intensive, but proportionately nowhere near as dependent as it used to be”.
What about the possibility of a crash in financial markets in the wake of the Iran war? “I'm much more sanguine about this than perhaps many other people would be,” Sheard said.
Tran predicted a “market correction” rather than a market crash. “The overall conclusion I want to offer up front is that I think of these things more like a series of mini crises than a big crisis,” he said.
There is, he added, “a very elevated degree of uncertainty. We don't know why the war started and how it will be conducted or when it will end, but something that people are beginning to realize is that it could linger for longer than they expected a month ago. And, of course, the longer it lasts, the more damage it will do”.
The impact of the Iran war, Tran said, “has been not very generalised, but more focused and asymmetric. In other words, if you look at the region of the world most impacted by the energy disruption in supply and increase in prices, you see Asia being hit the most [compared to] Europe, and then U.S. is relatively isolated. And you see that reflected in the relative performances of equity markets. Every one declined, but the U.S. by much less than what we have seen overseas in Europe in particular”.
The impact has also been more “sector specific”, he said. “Energy intensity of economic activity is lower than 20 years ago or 10 years ago, much lower in the U.S. than elsewhere. But the AI investment boom is very much dependent on cheap, reliable energy, particularly data centers. And the disruption in the supply chain, particularly for oil, energy and other commodities, will change the cost-benefit calculation of AI investment.
"The boom that we saw in recent years was very much driven by economic growth in the US and the performance of the equity market [there]. That will slow.
"Beyond energy, we see also disruption and price increases in other commodities such as nitrogen phosphate to make fertiliser. And that will eventually [result in a] lack of supply of fertilizer for the planting season, now showing up as lower yield in the harvest season in the autumn. So, in three to six months’ time, we will see food shortages and higher food prices.”
This, Tran suggested, "is part of the overall series of mini crises or problems that are confronting the world economy”.
Koll said Japan “is highly exposed to a global energy crisis and global energy prices. And the issue is not inflation. The interesting part is the potential demand deflation impact that you have from higher energy prices.
"Japan is exposed because it still has an economic structure and particularly a financial economy that is utterly dependent on the rest of the world. Corporate Japan today, basically 70% of its earnings are generated from dealing with the rest of the world, either exporting or producing, and this has expanded because it used to be dominantly the industrial companies.
“About 30 years ago, it was only about 30% of corporate earnings. So Japan's dependence on the rest of the world has grown. About 31% of Japanese corporate earnings come from dealing with the U.S. About 18% come from dealing with the People's Republic of China. And about 20% come from dealing with the rest of Asia and of the rest of Asia, unfortunately, is very exposed, to a global oil shock.
”If oil prices were to stay between $100 and $110 a barrel, global growth would decline by something like 1.2 percentage points, which means that Japanese corporate profits would drop by between 30 and 35 percent, just from that gearing that you have into the global economy."
Why is it that the Japanese financial markets take it on the chin when the uncertainty is global in nature?
“It is exactly because Japan is the most exposed to global business cycles, to global demand swings, rather than being resilient in terms of actually generating profits in its own markets,” Koll said. “This is a structural issue. Japan needs to create an economic structure at home where domestic profitability is actually attractive. The big problem is the fact that the Japanese industrial structure is way too fragmented.”
Anthony Rowley is a columnist and contributor for the South China Morning Post.
