BoJ policy board member Kazuyuki Masu said an Iran war-driven energy shock could hit Japan’s economy harder than the 1973 oil crisis, and said the risk needs attention.
He said Japan’s inflation is being shaped by higher personnel expenses, distribution costs, and the effects of a weak yen.
Iran Conflict Energy Shock Risk
He said food prices, viewed over the long term, are a key driver of future inflation.
He said Japan is no longer in a deflationary period, and that negative real interest rates should be dealt with as soon as possible.
He said that with the policy rate near the estimated neutral level, the BoJ should assess prices, employment and financial conditions more closely before deciding further steps.
At the time of writing, USD/JPY was down 0.02% on the day at 157.85.
Market Positioning And Volatility
We are facing a potential energy shock from the Iran conflict that could be more severe for Japan than the 1973 crisis. With WTI crude oil having already surged past $125 a barrel this quarter, we remember how the 1973 shock sent Japan’s economy into recession while inflation soared above 20%. The risk of stagflation, where prices rise but economic growth stalls, is now the primary concern for the coming weeks.
The Bank of Japan is now under immense pressure to respond as inflation becomes more embedded in the economy. Japan’s core CPI for April 2026 recently registered at 3.1%, the 25th straight month it has been above the BoJ’s 2% target. This persistent inflation reinforces the view that negative real interest rates must be addressed with further policy tightening.
For currency traders, the weak yen at nearly 158 to the dollar looks increasingly unsustainable if the BoJ is forced to act decisively. We should consider option strategies that benefit from a stronger yen, such as buying JPY calls or using put spreads on the USD/JPY pair. Given the conflicting economic signals, buying volatility in the currency markets is also a prudent move.
The threat of stagflation is a significant headwind for Japanese equities, as higher energy costs will squeeze corporate profit margins. This, combined with the prospect of higher interest rates from the BoJ, creates a bearish outlook for the Nikkei 225 index. We believe purchasing puts on the index could be an effective way to position for a potential market downturn.
However, we must also weigh the view that the policy rate is near its neutral level, which could limit how aggressively the BoJ can hike without damaging the economy. We recall their surprise policy adjustment in late 2025, which shows they can act decisively but also that their path forward is not always clear. This uncertainty between needing to fight inflation and fearing a recession is precisely why derivative positions should be carefully managed.
