Japan: the most vulnerable country in the Hormuz blockade

TokyoThe Tokyo stock market experienced one of its most turbulent sessions in recent years on Monday. The benchmark Nikkei 225 index plummeted more than 4,000 points, a drop of approximately 7%, amid investor panic over the blockade of the Strait of Hormuz, a major artery for global oil trade. The plunge comes just a week after the index reached new all-time highs, a stark contrast that illustrates how quickly the energy crisis can reverse market optimism. Faced with escalating tensions, Japanese Prime Minister Sanae Takaichi announced that the government is considering tapping into strategic petroleum reserves and implementing measures to curb rising gasoline prices, which could exceed 210 yen per liter, up from 138 yen just a few weeks ago.

The market reaction highlights a structural vulnerability in Japan: the country has virtually no energy resources of its own and imports more than 90% of the oil it consumes, a dependence that makes it especially sensitive to any shocks in the global crude oil market. Since the closure of a large part of its nuclear power plants following the Fukushima Daiichi nuclear accident exactly fifteen years ago, Japan has further reinforced its reliance on fossil fuels to power its industry and electricity grid. In this context, any tension in the Persian Gulf—and especially in the strategic Strait of Hormuz—has an immediate impact on the Japanese economy.

This vulnerability becomes even more evident when considering the origin of the crude oil that fuels the Japanese economy: approximately 90% of the oil the country imports comes from the Middle East, with key suppliers such as Saudi Arabia, the United Arab Emirates, and Kuwait. Much of this supply passes through the Strait of Hormuz, the maritime passage through which nearly a fifth of the world's oil flows, and any disruption in that strait, even a temporary one, has the potential to immediately disrupt energy prices and strain the most import-dependent economies, including Japan's. The impact of an energy price surge is not limited to financial markets. A sustained increase in the price of crude oil quickly translates into more expensive gasoline, higher electricity bills, and higher production costs for the country's powerful manufacturing industry. In an economy still struggling to consolidate its recovery after years of modest growth, rising energy costs can fuel inflation and reduce domestic consumption. Moreover, the persistent weakness of the yen makes energy imports even more expensive, further increasing the pressure on businesses and households. Given this scenario, the Japanese government is exploring various ways to mitigate the impact of a potential energy shock. Among the first options is the use of strategic petroleum reserves, an instrument the country has already used in other crises to stabilize supply and contain rising prices. The government could also increase gasoline subsidies to protect consumers and businesses, a policy implemented in recent years to mitigate the impact of rising crude oil prices. In the longer term, the debate on energy security has once again brought to the forefront the reactivation of more nuclear reactors, a sensitive issue in the country since the Fukushima disaster.

The burden of debt

However, the government's room for maneuver is limited, as Japan carries the highest level of public debt among major advanced economies, with debt well over twice its gross domestic product. This fiscal burden makes it difficult to deploy large stimulus packages without further increasing the pressure on public finances. In this context, a prolonged energy crisis would not only threaten the country's economic growth but would also test Tokyo's ability to protect its economy from an external shock at a time of financial fragility.

The Hormuz blockade is not just a logistical challenge but a litmus test for Takaichi's leadership. In a government that dreams of geopolitical relevance, energy fragility dictates reality: without a clear path toward self-sufficiency or new alliances in the Indo-Pacific, the Japanese economy will remain hostage to conflicts on the other side of the continent and to an electricity bill that threatens to slow its growth.