The diversity of Asia's economies — spanning commodity exporters and importers, manufacturing powerhouses and services-oriented hubs — means the conflict's effects vary dramatically across economies and asset classes, especially when considering their varying sensitivities to oil and gas prices.
This paper examines the macro and market implications through various scenarios for oil prices and traces their consequences across the region's major economies, equity markets, and credit complexes. Our base case assumes the conflict resolves within months, but we also consider outcomes under more adverse scenarios to help investors position for a range of possibilities.
Despite being the world's largest destination for oil and liquefied natural gas transiting the Strait of Hormuz, China's economy appears relatively insulated. Its energy mix remains structurally less oil- and gas-intensive, with coal, nuclear, and renewables accounting for roughly three-quarters of total supply. Even within oil and gas imports, dependence on the Middle East is modest at approximately 35%, containing the direct growth impact from higher energy prices.
That said, a prolonged conflict that meaningfully slows global growth would weigh on China through weaker external demand — particularly as exports have emerged as the single most important growth engine amid soft domestic momentum.
The inflation implications need to be assessed against China’s entrenched deflationary backdrop. War-related commodity price shocks drove a turnaround in headline producer prices in March, with PPI rising 0.5% year-on-year — the first positive print after 41 consecutive months of deflation. However, this rebound was almost entirely imported in nature, reflecting higher prices for oil and energy-related inputs. Consumer-facing producer prices remained firmly in deflation at -1.3% year-on-year, underscoring weak pass-through from upstream to downstream amid subdued domestic demand. CPI remains similarly muted, with gains largely offset by falling food prices and softer tourism-related services. We expect CPI to stay well anchored, particularly given ongoing domestic price controls that limit the transmission of higher fuel costs to households.
Comparisons with Japan's post-Ukraine reflationary episode — when imported inflation helped break a prolonged deflationary cycle — only go so far. We do not view this as a durable end to China’s PPI deflation. Persistent industrial overcapacity and a structural supply-demand imbalance remain at the core of China's deflation challenge, conditions that an external commodity shock alone is unlikely to resolve.
In Chinese equities, investors have refocused on fundamentals including AI developments, macro data, and belated fourth-quarter earnings. Reaction to earnings has been mixed, with internet platform giants prioritizing reinvestment into AI data center capacity, agentic AI, and e-commerce market share over near-term profit growth. Encouragingly, agentic AI adoption is accelerating — exemplified by the rapid uptake of autonomous AI agent OpenClaw — which could drive greater token usage and adoption of Chinese large language models. With earnings now largely reset, profit growth expected to accelerate, and valuations below ten-year averages, the risk-reward skews positively for offshore Chinese equities. We view the impact of oil prices on earnings as manageable, even if sustained at $100 per barrel.
Japan is among the most exposed markets to the Iran conflict. The economy's energy self-sufficiency ratio stands at just 13% — among the lowest for major developed markets and compared to China’s 76% — and it sees more than 90% of its crude oil imports transit the Strait of Hormuz. Domestic refinery infrastructure is largely configured to process Middle Eastern crude, making Japan particularly vulnerable to both supply disruptions and sustained price increases.
This exposure creates an especially challenging growth-inflation trade-off. Higher energy prices tend to slow output meaningfully while pushing core inflation higher, complicating the Bank of Japan's (BoJ) policy normalization path. Although the government has deployed gasoline subsidies to cushion the shock, the fiscal cost is substantial — estimated at roughly ¥500 billion per month — adding strain to an already vulnerable fiscal position and pointing to their role as a temporary buffer rather than a lasting solution.
The BoJ faces a difficult dilemma. In the near-term, it may need to accelerate rate hikes to stem imported inflation and anchor expectations. However, if the conflict is prolonged and demand destruction becomes more pronounced, the tightening bias could ultimately give way to renewed easing. Should oil prices plateau around $100 per barrel for three to six months, Japan's real GDP growth in 2026 could slow toward zero. Meanwhile, yen depreciation risks would rise. Authorities appear determined to defend USD/JPY around 160–162, but the credibility of this stance would be increasingly tested under a prolonged energy shock, as deteriorating terms of trade and mounting fiscal pressures could overwhelm the yen's traditional safe-haven status.
For equities, the industrials sector — by far the largest in Japan — is highly sensitive to U.S. and global growth. The near-term impact of higher energy prices, if contained to a few months, would have a modest negative effect on earnings, partially cushioned by a weaker yen. With just modest upside to our TOPIX outlook, we reiterate a neutral view, with select opportunities in banking, industrial, and technology sectors offering alpha potential.
ASEAN economies are among the most exposed to the conflict given their heavy reliance on Middle Eastern energy imports — roughly half of Asia's crude and over a third of its gas imports transit through the Strait of Hormuz. The impact of the conflict has been immediate and severe: the Philippines declared a national energy emergency after gasoline prices more than doubled, Indonesia and Vietnam introduced energy rationing, and Thailand's fisheries sector began shutting down due to a surge in marine fuel costs.
The macro consequences may be acute if oil prices remain sustained at $100 or higher for several months. Higher energy prices feed directly into food inflation — which accounts for 25–35% of ASEAN CPI baskets — compressing household purchasing power and weighing on consumption. Central banks face a classic stagflationary bind: tightening into weakening growth to contain inflation, with limited fiscal buffers to cushion the blow. The Philippines, with only approximately 45 days of crude stockpile buffers, faces sustained fiscal and currency pressure. Indonesia's fuel subsidy costs are mounting, and Thailand's tourism and fisheries sectors could face prolonged disruption. Critically, Asian importers pay a premium for oil in their region, which largely trades on Dubai prices, which has a spread over Brent prices. This implies roughly 30% higher effective crude costs than the headline suggests.
The conflict is accelerating structural shifts toward energy diversification and supply chain resilience across the region. Malaysia offers relative safety as a net energy exporter, while Singapore — though a net importer of energy — is better equipped than most ASEAN peers to manage the shock given its strong fiscal position and role as a refining and trading hub, which has also led to a relatively stable equity market and currency amid regional demand for safe haven assets.
There is a growing view suggesting that Asia credit could be negatively impacted by higher oil prices — a fair observation, particularly for net importers such as India, Korea, and the Philippines. However, the picture is more nuanced than headlines suggest. Sensitivity varies meaningfully across the region: India, as one of the world's largest oil importers, is directly exposed; Hong Kong has limited direct linkage given its services-oriented economy; and Indonesia carries a partial natural hedge through its own energy exports, though higher oil prices can still strain its fiscal balance given domestic fuel subsidy obligations.
Importantly, many issuers carry strong buffers to absorb losses, and the high-quality composition of the index — 87% investment grade versus approximately 50% for broader emerging market debt — provides a meaningful layer of resilience. Our bottom-up analysis suggests this year's Asia high-yield default rate is likely to be among the lowest in five years at approximately 2.5%, reflecting cleaner balance sheets post-default cycle and a limited near-term maturity wall. While geopolitical developments may continue to pressure sentiment and drive further spread widening, meaningful value is emerging given the significant repricing in rates.
The Iran conflict has laid bare the vulnerabilities running through Asia's economies and markets, but it has also created opportunities for disciplined investors. Our base case — a resolution within months — points to a manageable impact on earnings and a compelling entry point across several markets, with compressed valuations offering attractive risk-reward.
For long-term investors, the key takeaway is the importance of diversification across geographies, asset classes, and structural themes. In equities, AI-driven earnings momentum in Korea and Taiwan provides a powerful secular tailwind, while China's reset valuations and accelerating AI adoption offer potential upside. In credit, Asia's investment-grade-heavy composition and declining default rates provide a resilient foundation, with repriced spreads creating selective value. Across Southeast Asia, the divergence between economies underscores the need for granular country selection, with Singapore emerging as an oasis of relative stability. Over the long-term, there could also be opportunities for these economies to undertake energy transition and diversification to reduce their reliance on oil and gas from the Middle East.
The duration and severity of the energy disruption would ultimately determine macro and market outcomes. But across scenarios, the investors well-positioned to navigate this environment are those who resist the temptation to retreat from the region and instead lean into the beneficiaries of structural growth stories — focusing on AI and global fragmentation.
For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material. Indices are not investment products and may not be considered for investment.
All market and economic data as of April 2026 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
Past performance is not a guarantee of future returns and investors may get back less than the amount invested.
We can help you navigate a complex financial landscape. Reach out today to learn how.
Contact usInvestment Strategy
LEARN MORE About Our Firm and Investment Professionals Through FINRA BrokerCheck
To learn more about J.P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our J.P. Morgan Securities LLC Form CRS and Guide to Investment Services and Brokerage Products.
JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("JPMS"), a member of FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.
Please read the Legal Disclaimer (for J.P. Morgan regional affiliates and other important information) and the relevant deposit protection schemes.
