By Leika Kihara
TOKYO, April 2 (Reuters) – Japan’s economy may face supply shocks and slumping demand from the Iran war, a risk the central bank may be overlooking by focusing on inflationary pressures, former central bank official Nobuyasu Atago said on Thursday.
A slew of recent hawkish communication from the Bank of Japan has led markets to bet on roughly a 70% chance of a rate hike in April, as soaring oil costs from the Middle East conflict and higher import costs from a weak yen heighten price pressures.
Even as they kept rates steady in March, BOJ policymakers debated additional rate hikes with some worries that the central bank may be falling behind the curve in coping with inflation risks.
Atago warned that an expected shortage of naphtha and other chemical products made during the oil-refinery process could be a bigger risk that could hurt 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,” said Atago, who is currently chief economist at the Rakuten Securities Economic Research Institute.
“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 roiled since the U.S.-Israeli war on Iran effectively shut the Strait of Hormuz, a passageway for about a fifth of global oil and gas flows, which has driven up crude oil prices.
Hopes for a swift end to the war faded on Thursday after U.S. President Donald Trump vowed more aggressive strikes on Iran, heightening challenges for countries like Japan that rely on imports of Middle Eastern oil and naphtha.
The bulk of naphtha consumption is for petrochemical use, where it is cracked in steam crackers to produce ethylene and propylene – core building blocks for plastics, synthetic fibres and other products.
A shortage of naphtha would hit factory output and the damage to the broader economy would intensify from the current quarter, Atago said.
While government data showed manufacturers expecting output to rise 3.8% in March, actual production will likely fall as the estimate does not incorporate the war’s impact, he said.
Any restriction that the government might impose on economic activity to curb fuel consumption may also hit demand during Japan’s peak travel season that begins in May, he added.
“Japan may suffer stagflation this summer with prices spiking and the economy slumping at the same time,” Atago said.
The BOJ is probably using its nationwide branch offices to collect information on how petrochemical plant operators are coping, which could be reflected in a report on regional economies due on Monday, Atago said.
But such data may not convince hawkish BOJ policymakers to change their minds, he said.
“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.”
(Reporting by Leika Kihara; Editing by Thomas Derpinghaus)
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