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Japanese equities in the context of the Middle East crisis

Sumitomo Mitsui DS Asset Management
Published
25/03/2026
Read time 7 minutes
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The state of play as at 25 March 2026:
  • The ongoing conflict in the Middle East represents a fundamental supply shock to the energy market, comparable in scale to that seen in 2022 following the outbreak of war between Russia and Ukraine.
  • The resulting shift from expectations of rate cuts to rate hikes in the US and other developed markets indicates a potentially challenging period for equities; however, we regard monetary conditions as secondary to rising energy input costs.
  • The crisis is likely to lead not only to elevated energy prices in the short term but also to significant structural implications in the medium and long term, where both energy efficiency and energy substitution techniques come into play.
  • Whilst Japan faces notable headwinds in the short term from high energy prices, we remain highly optimistic about the Japanese market on a forward-looking basis, given Japan’s industrial strengths and proven ability to adapt to previous supply-side shocks.
  • With respect to Japanese corporate earnings, under our base scenario we estimate a decline of around 2% in TOPIX EPS and expect the impact on valuations to be limited. However, in the worst-case scenario of a prolonged conflict and persistently higher energy prices, we estimate that TOPIX EPS could fall by as much as 17%, which we believe would lead to both lower earnings and lower valuations.
  • Taking these factors into account, under our main scenario as outlined below, we see the probability of stagflation at around 5–10%.

 

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