A Third Oil Shock? How Tokyo Can Avert Chaos

このページを で読む

Amid escalating conflict in Iran, some are warning of a looming "third oil shock." For an economy as energy-dependent as Japan's, how severe could the fallout be — and what steps should the Takaichi administration take to cushion the blow?

First, it's worth revisiting the first and second oil crises. The October 1973 outbreak of the Yom Kippur War triggered a fourfold surge in crude oil prices, sending shockwaves through Japan's economy. 

Domestic prices subsequently climbed by as much as 24%, in what came to be known as the "price frenzy."

The Real Shock Was Monetary

However, a closer look at the sequence of events tells a more nuanced story. Japanese yen's appreciation gathered pace following its revaluation about a year before the war, prompting the government to step in with dollar-buying intervention. To finance this, short-term government securities (FBs) were issued and fully underwritten by the Bank of Japan. 

Crucially, because the bank didn't promptly sell off these securities, the monetary base, or the money supplied by the central bank, expanded sharply. 

The result was a surge in excess liquidity, which in turn fed into rising costs.

As a result, inflation had already surged past 10% by May 1973 and reached roughly 15% by October — on the eve of the crisis. In reality, the oil shock did not ignite inflation so much as pour fuel on a fire already burning.

When people think of price frenzy, what often comes to mind is the infamous episode of "toilet paper hoarding." 

I recently spoke with the head of a major paper manufacturer, who recalled that inventories at the time amounted to little more than a one-month supply. Under normal purchasing patterns, that would have been sufficient. But intense media coverage triggered a wave of panic hoarding, as consumers rushed to stockpile the product.

Even today, media coverage of the oil shock often defaults to footage of the "toilet paper hoarding" of that era. Yet I have never come across a report that clearly states that the root cause of the inflation lay fundamentally in a failure of monetary policy. 

In fact, during the second oil shock in January 1979, there was no comparable surge in the monetary base, and inflation remained relatively contained.

Perhaps it is time the media stopped sensationalizing the symptoms.

Markets Bet on Calm

When assessing whether a third oil shock is on the horizon, the decisive variable is the duration of the war in Iran.

First, consider WTI (West Texas Intermediate) crude oil futures, the benchmark for US crude. Following President Trump's speech on April 2, prices spiked — most notably in near-term contracts. The May contract jumped to $112 per barrel, July to $89, November to $73, and March of next year to around $70.

Even so, the overall futures curve suggests that markets expect prices to stabilize over time, rather than remain at elevated levels.

The following events have been cited as potential "off-ramps" from the Iran conflict: 

• US–China summit scheduled for May 14–15 
• US Independence Day, which in 2026 marks the 250th anniversary
• US midterm elections on November 3 

Incidentally, betting markets in the US paint a relatively optimistic picture. The implied probability of a ceasefire stands at around 50% by May 31, 60% by June 30, and roughly 70% by year-end. These are noticeably more upbeat than signals from the futures markets. 

In other words, many still appear to believe that a ceasefire within the year is well within reach.

Markets Speak, Politics Decides

These are, of course, not my personal forecasts, but reflections of market pricing. Yet even presenting such data has drawn criticism that I am "far too optimistic." 

The reality, however, is that views on the future inevitably differ. And markets exist precisely to aggregate those differences. If one disagrees with what the data implies, it may be more productive to take a position than to fault the messenger.

What, then, will happen to domestic gasoline prices? With subsidies in place, it is unlikely there will be any sharp movement for now. The main variable will be the size of those subsidies.

The provisional budget runs through April 11, and with the regular budget set to take effect automatically by April 12 at the latest, the current subsidy framework is unlikely to lapse. The real question is what happens if funds are eventually exhausted. More specifically, whether a supplementary budget will be enacted.

While such price controls are typically designed to be temporary and limited, any decision to extend them will ultimately rest on high-level political judgment.

If subsidy disbursements are extended through a supplementary budget, gasoline prices in Japan are likely to remain broadly stable. If not, they will once again be exposed to movements in the crude oil market.

For now, the crude oil futures market for 2026 has remained relatively steady, with prices expected to ease over time.

Prepare for the Worst

Of course, any policy response must also account for a worst-case scenario. An effective blockade of the Strait of Hormuz would constrain global crude supply, making it reasonable to plan on the assumption that oil prices could rise.

First, in the immediate term, Japan, in coordination with the International Energy Agency, should release strategic oil reserves to buy time. 

Over the medium term, the response should include restarting nuclear power plants, expanding coal-fired generation, and developing pipeline routes that bypass the Strait of Hormuz. 

Increasing energy imports from Western exporters, such as the US, would also be a viable option. Energy, after all, carries no political affiliation.

In any case, addressing the root causes of the supply disruption must remain the top priority. A prolonged blockade of the Strait of Hormuz could, over time, pose an existential threat to the Japanese economy. 

Tokyo, therefore, cannot afford to hesitate in taking all necessary measures from a security standpoint, including providing logistical support to US forces and undertaking mine-clearing operations.

RELATED:

• Takaichi Meets Trump as Iran Crisis Raises Pressure on Allies
• Japan to Release Oil Reserves Amid Supply Concerns

Author: Yoichi Takahashi, professor at Kaetsu University and former special advisor to the Cabinet

(Read the article in Japanese)

このページを で読む