Issue:
April 2026 | Deep Dive
A prolonged Middle East war could have catastrophic consequences for Asia … and for Japan most of all
Rarely can the law of unintended consequences (a theory popularised by American sociologist Robert K. Merton) have been more applicable than to Donald Trump’s war on Iran.
Outside the Middle East, the impact of U.S. and Israeli attacks on Iran will be felt most keenly in Asia, the world’s most energy import-dependent region. It will almost certainly hurt Japan more than the U.S.’s rival superpower China, which may even emerge from the crisis with its international image enhanced.
There is widespread agreement that the assault on Iran, apparently under the direction of Israeli Prime Minister Benjamin Netanyahu, was ill advised and poorly planned. But its economic and financial consequences are only now beginning to be understood.
This is not a typical “oil shock” of the kind endured by Asia and other key regions of the world in recent decades. Its most obvious impact is on energy supply and prices, but it also critically impacts petrochemicals, manufacturing supply chains, energy infrastructure, transport networks (land, sea and air) as well as financial systems and markets. Virtually the whole world is in crisis, and Asia especially. For one thing, about 80% of the region’s total energy imports pass through the vital Strait of Hormuz.
Countless words have been spoken or written about the conflict, but some of the most telling of these were voiced at a Deep Dive expert panel event held at the FCCJ on March 24.
If the conflict is short lived – lasting, say, one to two months – the impact could be modest. But a prolonged war will have “significant impacts on economic growth and inflation in Asia”, according to Matteo Lanzafame, director of the Asian Development Bank’s Macroeconomic Research Division.
A drawn-out conflict will increase the likelihood that “Asian economies could go into a significant recession or contraction in employment”, although the impact will vary from country to country, he said.
One determining factor will be the level of countries’ petroleum reserves, he said, noting that reserved in Japan and India are “not that high”.
The ADB is currently running risk scenarios for the Asia-Pacific region, to be published in its Asian Development Outlook next month. Lanzafame acknowledged, however, that even if the conflict ended tomorrow, the region would feel the economic and financial ramifications for weeks, even months.
That was among the more optimistic predictions aired at the Deep Dive event .“I think the [Iran] war is out of control,” said Richard Katz, a former senior fellow at the Carnegie Council on International Affairs and publisher of Japan Economy Watch. Katz suggested that Iran was intent on driving the price of oil so high that the U.S. and others wouldn’t dare launch future attacks.
Most revealing were the panel’s views on how China could emerge relatively unscathed economically from the crisis.
“I think China could weather the oil shock much better than Japan,” said Yuqing Xing, an economist at the Graduate Research Institute of Policy Studies (GRIPS) in Tokyo and a former fellow at the Asian Development Bank Institute.
China is the world’s second-largest consumer of crude oil and the world’s biggest importer, but even so, oil accounts for only 18% of its primary energy consumption. In addition, only 50% of oil and gas imports from the Middle East pass through the Strait of Hormuz.
“Closure of the strait may not significantly impact China’s oil supply,” Xing said, adding that China has “very diversified” sources of energy imports, including natural gas via pipelines from Russia.
At the same time, China and Iran have developed a comprehensive and strategic relationship in energy and trade that extends to the military and strategic realms.
The leverage this provides means “it is highly likely that China may moderate a ceasefire or peace accord”, Xing said. “That would strengthen China’s influence as a responsible superpower.”
Japan, by contrast, “is an economy that is very vulnerable to shocks”, according to Katz. Mineral fuel imports to Japan are equal in value to 3% to 4% of GDP, and the recent sharp rise in fuel prices represents an equivalent transfer of Japanese purchasing power away from consumers. “That is a huge hit to the economy – the kind that could cause a recession,” Katz said.
Trump’s trade war with China, meanwhile, hurts Japan as China is the destination for 75% of Japanese global exports. As Katz noted, what Japan exports to Asia beyond China is “highly correlated” to what the Asia region as a whole exports to the U.S. That means Trump’s war is hitting Asia on multiple fronts.
What can Asian governments do in response? Some – not least Japan – are moving to soften the blow to consumers and businesses by subsidising the cost of gasoline at the pump or via other energy subsidies. But that isn’t viable or sustainable, Lanzafame said. Fiscal positions are already strained in Asia, and subsidies negate a "price signal" that could otherwise encourage households and businesses to conserve energy, he added.
Anthony Rowley is a columnist and contributor for the South China Morning Post.
