On the morning of March 23, within less than 10 minutes of the Tokyo market opening, the Nikkei 225 had already fallen nearly 2,000 points, down more than 3.5%. Losses then continued to widen, at one point reaching a 5% decline. There are three main reasons behind the sell-off.

Reason 1: Oil Prices Are the Lifeline of Japan’s Economy

Since the U.S.-Iran conflict began on February 28, Brent crude has risen more than 50%, briefly surpassing $118 per barrel. For most countries, this is inflation pressure; for Japan, it is a crisis.

More than 90% of Japan’s oil imports come from the Middle East, and its industrial supply chain heavily depends on regional naphtha. When tankers through the Strait of Hormuz are disrupted, Japan’s production costs rise almost in tandem with oil prices. Higher oil prices worsen Japan’s terms of trade, disrupt supply chains, and increase pressure on economic growth and the yen.

Reason 2: Foreign Capital Outflows

Data from Japan Exchange Group shows that in the week ending March 13, overseas investors net sold about ¥491 billion (approximately $3.1 billion) of Japanese equities, the largest weekly net outflow since September 2023.

This sell-off ended a nine-week streak of net buying, previously driven by optimism over Prime Minister Sanae Takaichi’s fiscal expansion policies.

As oil prices remain elevated, corporate profit expectations in Japan are being revised downward, while depreciation pressure on the yen intensifies. Returns in U.S. dollar terms are further reduced. Yonhap News also noted that over the past three weeks, the Nikkei 225 has fallen 9.31%, ranking among the worst-performing major global indices.

Reason 3: Shift in the Bank of Japan’s Stance

On March 19, the Bank of Japan kept its policy rate unchanged at 0.75%, in line with expectations. However, Governor Kazuo Ueda’s remarks drew market attention.

Ueda stated that rising oil prices would push inflation higher and warned that escalating tensions in the Middle East have become a key risk factor. Faced with major external shocks, the BOJ typically adopts a cautious stance, often slowing or delaying policy normalization.

This suggests that expectations of continued rate hikes and a stronger yen are weakening. If inflation rises due to oil but rate hikes are delayed, the yen will remain under pressure, reducing the appeal of yen-denominated assets to foreign investors.

In addition to fundamentals, two technical factors amplified today’s decline. First, catch-up selling after the holiday. Japan’s stock market was closed last Friday (March 20), while U.S. and European markets had already declined. With no easing in the U.S.-Iran conflict over the weekend, pent-up selling pressure was released at the open.

Second, regional panic spillover. This morning, South Korea’s KOSPI plunged 5%, triggering a circuit breaker and halting program trading for 5 minutes. The sell-off in Korean equities further intensified risk aversion across Asia, pushing the Nikkei lower after the news broke.

Faced with surging oil prices, Japan has taken action. On the morning of March 23, NHK reported that the government will use about ¥800 billion in budget reserves to curb gasoline prices. This aims to ease energy cost pressures on businesses and consumers through subsidies.

After the market close, attention will focus on two signals: whether the government’s fuel price control measures can be implemented, and whether the BOJ will hold an emergency meeting to adjust rate expectations. However, until tanker traffic through the Strait of Hormuz resumes, these measures may only serve as temporary relief rather than a fundamental solution.