TOKYO — The US-Israeli campaign against Iran that began in late February has triggered an energy shock that is reshaping Asia’s 2026 outlook. What had looked like a year of solid growth is now threatened by surging energy and fertilizer costs, looming food-price rises, and narrower policy space for governments and central banks across the region.
The IMF warns that the war and resulting supply disruptions are pushing up inflation, weakening external balances and tightening policy choices, underscoring Asia’s heavy reliance on imported oil and gas. The longer hostilities continue — and with reports that the US is preparing for extended naval operations around the Strait of Hormuz — the greater the likelihood oil prices remain elevated. The World Bank projects energy prices could jump about 24% this year, the largest increase since 2022’s Russia-Ukraine shock, with cascading effects on food, inflation and borrowing costs.
Japan illustrates the dilemma facing advanced Asian economies. The Bank of Japan recently kept rates unchanged despite forecasts of headline inflation near 2.8% for the year — above its 2% target — because growth is weakening, creating a stagflation-like tradeoff. Wage growth has softened, labor indicators have worsened and the yen has weakened to multidecade lows, complicating policy choices as import bills rise.
China is likewise mobilizing policy responses. Beijing’s Politburo has emphasized shoring up supply chains and boosting confidence, and officials appear to be relying on monetary measures to cushion the fallout. First-quarter growth beat expectations at 5% year-on-year, but analysts warn that those figures don’t yet show the full effect of higher oil prices and slowing external demand. Exports have cooled, leaving growth skewed toward trade and vulnerable if global demand softens further.
Across East and Southeast Asia, governments are scrambling to blunt the shock. South Korea rolled out roughly $7.1 billion in stimulus after the crisis began, yet its economy remains highly exposed: about 70% of its oil imports come via the Middle East and the Strait of Hormuz, and the won has fallen to 17-year lows. The Philippines declared a national energy emergency as gasoline prices more than doubled. Indonesia and Vietnam have implemented energy rationing; Thailand’s fisheries and tourism face rising costs and disruption.
Many ASEAN economies are particularly exposed because a large share of regional crude and gas imports transits the Strait of Hormuz. JP Morgan notes the immediate impact: sharp spikes in fuel and fertilizer costs, rationing, sectoral shutdowns and greater food-price pressure. Food makes up 25–35% of consumer baskets in many Southeast Asian countries, so sustained oil above $100 per barrel would quickly erode household purchasing power and weigh on consumption.
The crisis has pushed some countries toward short-term diversions, including increased purchases from Russia for fuel and fertilizer. ASEAN diplomats are balancing immediate domestic pressures against broader geopolitical concerns over enabling Russia’s war in Ukraine.
Central banks across Asia face a classic stagflation conundrum: raising rates to curb inflation risks choking already-fragile growth, while holding rates leaves inflation entrenched and imports more costly on depreciated currencies. Fiscal space is limited in many developing economies, constraining options to shield households. Countries with low crude-stock coverage, like the Philippines, are particularly vulnerable to prolonged supply disruptions and currency pressure. Indonesia’s fuel subsidy bill is rising rapidly, squeezing budgets further.
Not all observers are pessimistic. Some asset managers point to corporate resilience and the presence of high-quality businesses that can continue to deliver returns despite macro shocks. But the dominant uncertainty is geopolitical: markets are reacting to each development around the Strait of Hormuz, and the real turning point will be a durable resumption of oil flows, not merely a negotiated ceasefire.
Economists warn that the poorest populations will suffer most as food and energy inflation bite and borrowing costs rise. Policymakers are urged to focus on immediate market stability and protecting vulnerable households while pursuing measures to boost longer-term resilience — diversifying energy sources, strengthening supply chains and building fiscal buffers.
For now, Asia is adapting to a drip-feed of oil and a volatile price environment. Until shipping through the Strait is reliably restored, policy makers, businesses and consumers in the region will continue to contend with higher costs, weaker growth prospects and heightened uncertainty.
