TOKYO – The panic on South Korea’s trading floors this week after rapid fallout from the Middle East conflict may be a harbinger for wider Asian pain.
On Tuesday and Wednesday the Kospi tumbled about 18% across two days as US‑Israeli strikes on Iran stoked regional instability. The selloff highlighted how exposed trade‑dependent South Korea is to a shock that could upend supply chains and lift oil prices. Although markets recovered somewhat on Thursday, fear persists.
Part of Korea’s recent boom was driven by an AI‑led rally: the Kospi had surged about 139% over the prior 12 months, powered by gains at Samsung Electronics and broad AI enthusiasm. Retail investors piled in with leverage, raising the risk that sudden uncertainty and higher energy costs could chill AI investment globally.
Korea is not alone. Across Asia — from China and Japan to Indonesia and India — policymakers and investors are scrambling to assess vulnerabilities and to brace for possible financial contagion if the Iran crisis spreads.
Energy is the main transmission channel. Jim Burkhard, head of crude research at S&P Global Energy, warned the conflict could trigger “the largest oil supply disruption in history” if tanker traffic is impaired. Capital Economics’ William Jackson estimates that a short conflict could keep Brent around $80 a barrel, while a longer war could push it toward $100, adding roughly 0.6–0.7 percentage points to global inflation.
For Asia, every sustained $10 per barrel rise in oil typically trims GDP growth by about 20–30 basis points, Morgan Stanley economists say, with India particularly exposed. India’s current account deficit — about 1.2% of GDP — would widen by about 50 basis points for each $10 increase in oil. Thailand, Korea, Taiwan and India are among the economies most vulnerable because of larger oil and gas balances.
Beyond crude prices, the conflict affects mobility, construction, finance and defense, says Alicia Garcia‑Herrero, Natixis’ Asia Pacific economist. Prolonged disruption could make temporary freight rerouting and delays permanent, pushing up import costs and inflation, hurting airlines, and denting tourism spending from wealthy Middle Eastern visitors.
Direct Asian imports of Iranian crude have fallen since 2018 sanctions reimposition, and only China has kept significant volumes via shadow shipments — reportedly taking over 90% of Iran’s oil flows. But Iran’s control over the Strait of Hormuz is the real threat. About one‑fifth of the world’s oil and gas moves through the strait daily, and heightened security risks plus insurers’ reluctance to provide war coverage have already constrained shipments.
US President Donald Trump has proposed naval escorts for tankers, which briefly eased oil prices, but analysts caution that organizing such convoys would take time, add risks for military personnel, and pose logistical and insurance challenges.
Asian capitals fear that any sustained tightness in physical supply will keep energy prices elevated until risks abate. That would aggravate inflation and strain economies still recovering from earlier shocks.
There are limited near‑term silver linings: overvalued markets may simply correct rather than crash, and some strategists see buying opportunities in defense, power, and companies returning cash to shareholders. But the geopolitical fallout could be deeper and longer lasting.
China faces both economic and strategic challenges. The Middle East supplies roughly half of China’s crude imports, leaving Beijing exposed if disruptions continue. Authorities have built strategic petroleum reserves and commercial inventories that provide buffers, and some analysts expect the economic hit to be manageable if the conflict is short. Still, higher inflation and pressure on China’s export engine remain risks, and the political damage from US actions in Venezuela and Iran could reshape Beijing’s calculations.
China also lowered its 2026 GDP target to 4.5–5%, a sign of cautious policymaking as global risks mount.
Japan is likewise vulnerable. Over 60% of Tokyo’s oil imports transit the Strait of Hormuz. The yen weakened this week rather than acting as a safe haven, compounding the effect of rising energy costs. Prime Minister Sanae Takaichi faces a delicate political balancing act: backing closer ties with the US risks domestic backlash if Japan appears aligned with US military adventurism, while tensions with China over Taiwan have prompted Beijing to tighten export controls affecting Japanese industries.
Japan’s economy depends heavily on exports to the US and China; tariffs or trade friction from either could deepen Tokyo’s slowdown. Policymakers are pursuing diversification of export markets and trade deals, such as encouraging EU participation in the CPTPP, but supply‑chain integration makes quick fixes difficult.
Back in Seoul, political fallout could be swift. The Kospi’s slide, the won falling to a 17‑year low, and emergency meetings called by President Lee Jae Myung, the finance minister, and Bank of Korea Governor Rhee Chang Yong underline how quickly economic stability can fray. Authorities say they are monitoring currency and bond moves closely to guard against deviations from fundamentals amid external shock.
Much depends on how far and how aggressively US foreign policy pushes the situation. JPMorgan economist Joseph Lupton cautions that a renewed US‑led military escalation layered on existing trade tensions could derail an incipient recovery in hiring and non‑tech capital spending, reigniting worries about global stability.
For now, markets and policymakers in Asia are braced for a period of elevated risk: higher energy costs, supply‑chain disruption, and geopolitical realignments that could reshape trade and growth trajectories across the region.
Follow William Pesek on X at @WilliamPesek
