TOKYO — As the US-Israeli war on Iran drags on indefinitely, Asia is realizing the extent to which 2026 is a major game-changer for a region that had been “the main driver of global growth.”
This is the International Monetary Fund’s characterization. But what a difference two months of hostilities in the Middle East make for Asian economies from Japan to Indonesia.
Since bombs began falling on Tehran on February 28, the resulting surge in the costs of energy and fertilizer — and the coming jump in food prices — has governments scrambling to sandbag their economies.
Unfortunately, many are already running out of plays. Typical responses like subsidies, curbing fuel use and asking those who can work from home to do so aren’t doing the trick.
Though “Asia entered 2026 on a strong footing,” notes IMF economist Andrea Pescatori, “the war in the Middle East and the ensuing energy supply shock are raising inflation, weakening external balances, and narrowing policy options, underscoring the region’s dependence on imported oil and gas.”
The bottom line, he adds, these “headwinds will test Asia’s resilience.”
The intensity will increase the longer the conflict lasts. US President Donald Trump is reportedly telling White House staffers to prepare for an extended period of US naval blockade activity of the Strait of Hormuz. The Middle East conflict, now stretching into a third month with scant sign of resolution, means oil prices will continue racing higher.
Even if the war winds down in early May, the World Bank thinks energy prices will surge by 24% this year to their highest since Russia’s full-scale invasion of Ukraine four years ago.
“The war is hitting the global economy in cumulative waves,” says World Bank chief economist Indermit Gill. “First through higher energy prices, then higher food prices, and finally, higher inflation, which will push up interest rates and make debt even more expensive.”
Gill stresses that the energy shock will hit the poorest populations hardest, exacerbating the troubles of highly indebted developing countries. Yet Asia’s biggest, most advanced economies will also feel the pain.
Take Japan, where central bank officials took a reluctant pass on tightening policy on Tuesday. The Bank of Japan’s “hawkish hold,” as many economists put it, saw no fewer than three of its nine board members dissent in favor of a rate hike to 1%.
The decision to leave short-term rates at 0.75% seemed all the more perplexing, given that the BOJ forecasts inflation will climb to 2.8% this year. That’s well above the 2% target. But the BOJ is hemmed in by slowing growth — a roughly 0.5.% rate in 2026. In other words, stagflation.
The Iran war, meanwhile, is sending mixed signals to Japan. As Stefan Angrick, head Japan economist at Moody’s Analytics, says, “nominal pay growth has softened, and labor market indicators have worsened since late 2025.
At the same time, policymakers have grown increasingly uneasy about the yen’s pronounced weakness. The currency has averaged about 159 to the dollar for more than a month and has slid to multidecade lows against both the euro and the Swiss franc.”
China is also scrambling. Despite chatter that China is more insulated from the turmoil than most top economies, Xi Jinping’s government is springing into action as the fallout from Iran’s turmoil imperils global demand.
A Politburo meeting on Tuesday focused on strengthening China’s supply chains. According to Xinhua, the Politburo argued that “since the start of this year, China’s economy has got off to a strong start, with key indicators coming in better than expected.”
But, the Politburo noted, “it’s essential to bolster confidence and step up efforts with stronger and more concrete measures to ensure economic work is carried out effectively.”
Signals coming from the meeting, says economist Zhang Zhiwei, president of Pinpoint Asset Management, suggest “the government is aware of the difficulties and challenges the economy faces.” At this stage, Zhang concludes, the government “seems to be relying on monetary policy to mitigate the economic difficulties.”
If the fallout on global demand worsens and slams demand for Chinese goods, Beijing would likely become more aggressive with stimulus measures. One worry is false confidence about China’s ability to maintain 4.5% to 5% this year.
Though China beat forecasts in the first quarter by growing 5% year-on-year, the data “doesn’t yet reflect the impact of higher oil prices,” write analysts at Guosheng Securities. “The real test will begin in the second quarter.”
It’s problematic, too, that “growth remains lopsided towards exports,” says Tianchen Xu, senior economist at Economist Intelligence Unit.
In March, exports slowed sharply, increasing just 2.5% year-on-year. It was the smallest increase in five months. That put China’s March trade surplus at just $51.13 billion, far below expectations of $108 billion.
Until now, there’s been an argument that the risk of external shocks causing a sustained wage-price spiral in advanced Asia — including Japan, South Korea, Singapore and Taiwan — is low.
That’s “even with the Middle East conflict keeping energy prices elevated,” as Betty Wang at Oxford Economics wrote in an April 20 report. “Instead, labor market tightness and productivity appear to be the main drivers of wage volatility in modern times.”
Wang argued that “compared with the 2022 Russia-Ukraine war, when the oil price surge pushed up inflation and nominal wages across all four economies, labor markets are now softer, except in Japan.”
Demand conditions, Wang noted, “are also more subdued and fragmented, weighed down by tariff uncertainties and weaker confidence. These factors should limit the risk of broader price transmission to wages. Against this backdrop, policymakers should have greater scope to look through near-term price shocks.”
Yet with Asian officials now bracing for deepening Iran war fallout as hostilities stretch into May and beyond, officials are racing to batten down the hatches.
Korea, for example, was quick to roll out a $7.1 billion stimulus package to mitigate energy supply shocks. But the economy’s 70% dependence on Middle Eastern oil passing through the threatened Strait of Hormuz is a clear and present danger to inflation. The won’s recent drop to 17-year lows means Asia’s fourth-biggest economy must import commodities at elevated prices via an undervalued currency.
Oil shortages have led key Southeast Asian economies like Indonesia and the Philippines to look to Russia. Thailand is looking Vladimir Putin’s way for fertilizer.
For now, ASEAN governments are prioritizing short-term needs over any geopolitical fallout. In Brunei this week, at a meeting of the foreign ministers from the Association of Southeast Asian Nations, European Union foreign policy chief Kaja Kallas called on ASEAN to see the “big picture” that purchases from Russia will help Putin continue the Ukraine war.
Albert Park, chief economist at the Asian Development Bank, points out that adverse effects on growth will be “most severe” for economies in developing Southeast Asia, with inflation rising highest in South Asian economies.
These scenarios, Park notes, reflect a high degree of uncertainty about how the conflict and associated disruptions will evolve and should be treated with caution. In addition to higher energy prices, they account for broader supply chain disruptions and a global tightening of financial conditions.
“Prolonged energy disruptions could force economies in developing Asia and the Pacific to navigate a difficult trade-off between weaker growth and higher inflation,” Park says. “Governments should focus on containing market stress and protecting the most vulnerable, while adopting policies to improve longer-term resilience.”
In a recent report, JP Morgan analysts note that 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.
As they write: “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, JP Morgan points out, 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 consumer price index baskets — compressing household purchasing power and weighing on consumption.
Central banks, of course, are confronting a classic stagflation dilemma: they must tighten policy to rein in inflation even as growth momentum weakens, and they have limited fiscal space to soften the impact.
In the Philippines, the challenge is tougher. With only about 45 days of crude stockpile coverage, it remains exposed to prolonged fiscal strain and persistent pressure on the currency.
Indonesia’s fuel subsidy costs are mounting, and Thailand’s tourism and fisheries sectors are facing major disruptions. It’s worth noting that Asian importers pay a premium for oil in their region, which largely trades on Dubai prices, which have a spread over Brent prices. This implies roughly 30% higher effective crude costs than headlines might suggest.
Not everyone is worried about Asia’s prospects. “Asian economies are most sensitive to energy costs, though resilience differs by region,” says Isaac Thong, lead manager of the Aberdeen Asian Income Fund.
“From a market perspective, Asia’s overall exposure to conflict-related risks is limited, and the trust is predominantly positioned in high-quality compounders and consistent businesses. These companies are well placed to continue delivering returns amid the current uncertainty.”
For many, though, the biggest problem is uncertainty about where the Iran conflict is heading.
“About two months in, we remain stuck in the limbo of the US-Iran conflict, which has left the Strait of Hormuz largely closed and much of the world starved of the critical oil flows needed to power the global economy,” says Tian Yong Woon, economist at Haver Analytics.
In truth, Woon notes, “commodity and market valuations do not hinge so much on a peace deal itself, but rather on the resumption of oil flows through the Strait, something that could materialize even in the absence of a formal deal, though any agreement that includes and credibly delivers such a reopening would likely be warmly received by markets.”
Until then, Woon notes, “market gyrations are likely to persist, with prices fluctuating in response to each new snippet of news. And “the world will continue both to be starved of, while gradually adapting to, the drip feed of oil flows emerging from the Strait.”
As Asia struggles to answer these economic questions — and those it doesn’t yet know to ask — it’s in harm’s way as much as any time in the last 25 years.
Follow William Pesek on X at @WilliamPesek