Rising Oil Prices Threaten Takaichi’s Agenda, Says Monex’s Koll

p{}[4fm4r90aqoz2vojc19zp_media_dl_1.png Bloomberg

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(Bloomberg) — Rising oil prices risk delivering a fresh inflation shock to Japan, complicating Prime Minister Sanae Takaichi’s efforts to ease cost-of-living pressures, according to Monex Group’s Jesper Koll.

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If crude trades in a $100 to $120 per barrel range in the coming months, it would amount to a “supply shock” that could add close to half a percentage point to Japan’s consumer inflation, said Koll, expert director at the Tokyo-based firm, in a Bloomberg TV interview Monday. Bloomberg Economics estimates that crude may go to $108 per barrel if the Iran conflict intensifies, more oil infrastructure is struck and the Strait of Hormuz is closed.

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That would put the agenda of Takaichi at risk “because she has promised the Japanese people that she would bring energy and food inflation down,” he said. Higher fuel costs would widen Japan’s trade deficit and amplify imported inflation with Japan being a significant net oil importer, potentially adding further pressure on the already-weak yen.

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The currency has fallen about 0.4% against the dollar over the past three months, the worst performance among its Group-of-10 peers. While Takaichi’s resounding lower house election victory last month briefly supported the yen, the currency has since come under renewed pressure following reports that she is wary of further interest-rate hikes and after her nomination of two dovish Bank of Japan board members.

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An oil-driven price surge would also complicate the BOJ’s policy path. Such a shock “is to say that the Bank of Japan hiking interest rates is actually the wrong policy measure,” Koll said, arguing that additional fiscal support for households may be needed instead, a step that could inject further uncertainty into markets.

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Markets are already debating whether the central bank will face increased political pressure as it moves to normalize policy, even as Governor Kazuo Ueda appears committed to doing so. Overnight index swaps imply more than a 60% chance of a rate increase by the April meeting, with a quarter-point move fully priced in by July.

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Meanwhile, Koll said the outlook for the dollar remains constructive, a dynamic that higher oil prices would likely reinforce. Japanese investors are expected to continue “recycling the big current account surplus to buy global assets, particularly US assets,” he said.

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—With assistance from Haidi Lun and Avril Hong.

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