Asia’s long resilience to turmoil in the Strait of Hormuz is wearing thin. After months of burning through reserves and shielding consumers from the worst of it, the region’s oil importers are running out of room — and a shock that once looked containable is now poised to bite hard.
Policymakers from Tokyo to Jakarta are watching crude approach $100 a barrel again. Goldman Sachs is warning of $120 oil, pointing to intensifying attacks on shipping through the Strait of Hormuz and the Red Sea as the most likely trigger for a fresh price spike. Goldman economist Daan Struyven flagged the risk that supply-chain disruptions are broadening and intensifying.
Not everyone agrees the renewed strikes between the US and Iran mark a turning point. Rystad Energy’s Jorge León is skeptical that either side is escalating meaningfully or that conditions have materially shifted over the past two weeks.
Still, a conflict President Trump once predicted would last only weeks is approaching its seventh month, and tight oil supplies pose a clear danger to Asia’s import-dependent growth models. Just as troubling: the region’s toolkit for absorbing another Middle East oil shock is far more depleted than it was the first time around.
Through much of 2026, Asian governments and investors bet the Iran war would be short-lived. Hopes that cooler heads would prevail in Washington and Tehran haven’t materialized.
Trump, facing a war sliding into quagmire territory ahead of November’s congressional elections, appears increasingly eager to find an exit. His poll numbers have slumped into the low 30s as even Republicans grow uneasy about the war and a shaky economy — a striking reversal for a president who campaigned on extracting the US from foreign conflicts, only to start one it may not be able to win.
As oil prices climb again, Asian governments are confronting subsidy budgets already strained by the crisis’s first phase. India, Indonesia and the Philippines spent heavily defending their currencies and cushioning consumers from fuel price spikes. Bangladesh is grappling with severe power shortages. There is simply less fiscal room left to absorb another oil shock, particularly if shipping disruptions worsen with no end in sight.
A resurgent US dollar isn’t helping. Its strength is compounding inflation risks across Asia as local currencies weaken. The region is bracing for Friday’s US inflation report, which could all but lock in a Federal Reserve rate hike next week.
“A hot CPI print would all but seal a September hike and underpin a firmer US dollar,” says Elias Haddad, global head of markets strategy at Brown Brothers Harriman. “A cooler reading would strengthen the case for a hold and leave the dollar vulnerable to a dovish Fed repricing.” For now, markets — and governments — are bracing for the hotter outcome.
The picture is more complicated than a simple oil shock, however. Until now, China’s economic resilience has masked weakness elsewhere in the region. Its exports surged 25% year-on-year in August alone, marking a fifth straight month of growth in US-bound shipments despite tariffs — now up an annualized 6.1% for the year.
“We expect this trade resilience to persist, supporting our above-consensus export growth forecast this and next year,” says Oxford Economics economist Sheana Yue.
But China’s “K-shaped” economy — strong exports paired with weak domestic activity — leaves its role as the region’s growth engine more fragile than it appears. Trump’s latest round of tariffs, including against Canada, combined with higher oil prices, could dampen demand for Chinese goods and strain its $20 trillion economy. Should overseas appetite for China’s tech and AI-related exports fade, the ripple effects would slow growth across Asia.
Rising global bond yields — especially in Japan and the US — pose a further risk. In Tokyo, a volatile yen has markets on edge ahead of next week’s Bank of Japan policy meeting, with the currency surging on expectations of a September 18 rate hike and the possibility of intervention by the Ministry of Finance beforehand.
The bigger story may be Japan’s bond market, where 10-year yields have hit three-decade highs near 3%. With the worst debt-to-GDP ratio of any major economy — roughly 260% — and a shrinking population, Japan can ill afford today’s higher-inflation environment. Add Prime Minister Sanae Takaichi’s plans for increased spending and tax cuts, and investors have ample reason to sell Japanese assets.
“Higher JGB yields look to have been driven by the combination of fiscal deterioration concerns stemming from the government’s growth-oriented spending plans and inflationary pressures arising from developments in the Middle East,” says Morgan Stanley MUFG economist Koichi Sugisaki, warning that rising long-term rates could raise debt-servicing costs and feed a negative loop of worsening fiscal sustainability concerns.
It’s possible, he adds, that the Takaichi administration is now more focused on containing upward pressure on long-term rates — particularly the inflation risk tied to a weakening currency.
Global markets are keenly aware of how sharp yen moves can ripple outward, which helps explain why US Treasury Secretary Scott Bessent recently coordinated with Tokyo on a joint yen-boosting operation — the first of its kind since 1998 — aimed at discouraging Japan from selling US Treasuries to defend its currency.
Stabilizing the $32 trillion Treasury market may prove far harder: With US national debt topping $40 trillion and Trump pushing to curb the Fed’s independence, fears of a run on Treasuries prompted Bessent to launch a large-scale buyback program to cap yields.
The largest risks, though, are emanating from the Oval Office. Trump’s war in Iran, his tariffs and his efforts to exert control over Fed policy are eroding trust in the dollar and US government debt — and this week’s oil surge could prove the most destabilizing factor yet.
Asia’s biggest oil importers — Japan, South Korea, India and much of ASEAN — are all heavily dependent on crude shipped through the Strait of Hormuz and now face exposure on multiple fronts at once. They include: soaring insurance costs, higher input costs for refiners even before crude prices rise farther and growth downgrades across the region.
Developing Asia may not be facing a 1997-style crisis, but it is far more exposed than markets currently appear to be pricing in. If disruptions deepen, the next hit to Asian growth could prove harder to withstand than the last.
China’s capacity to prevent a Gulf disruption from pushing oil to $150 or even $200 a barrel may also be fading. Earlier this year, investors were surprised at how a sharp pullback in Chinese crude imports helped keep prices in check — the result, according to Société Générale, of strategic inventory releases, gains in renewable energy use, and rising output from Brazil and Venezuela, which together helped avert a repeat of the 1973 oil crisis.
“It represents one of the largest offsets to the shock, second only to Saudi rerouting flows and larger than coordinated strategic petroleum reserve releases from the US, Europe, and Japan,” says SocGen analyst Mike Haigh.
Another shock could hit China — and by extension Asia — from every direction. The region entered 2026 on solid footing, notes IMF economist Andrea Pescatori, but “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 says: These headwinds “will test Asia’s resilience.”
The trouble is that Trump’s war shows little sign of ending soon. Former US Defense Secretary Leon Panetta argues the Trump White House is in denial about the “endless war” it has entangled the country in, telling The Guardian that the US and Iran are locked in a stalemate with few paths to resolution — a stalemate he believes could drag on for another six months.
For Southeast Asia, which sources roughly half its crude imports from the Middle East, fiscal policy alone won’t be enough to offset the fallout, says Ambiyah Abdullah, senior economist at the ASEAN Centre for Energy.
Rising oil import costs will widen trade deficits, pressure exchange rates and push up interest rates — risks that, left unaddressed, could drive long-term currency depreciation. Managing exchange rates, she argues, is the most critical piece of ASEAN monetary policy given its influence on trade balances, inflation, and financial markets, and she believes monetary policy will need further tightening in response to the latest inflation shock.
With no clear end to the disruption in sight, Abdullah concludes that the region urgently needs “a coordinated and flexible mix of fiscal and monetary policies,” spanning everything from managing near-term inflation to redirecting investment toward energy transition, power grid interconnection and greater energy supply diversification.
Easier said than done — especially when the central problem remains not knowing where the conflict goes next. In the meantime, expect oil markets to keep lurching with every fresh headline, as Asia remains hostage to uncertainty over how long vital energy supplies will stay constrained.
