Japan’s Finance Minister Satsuki Katayama said on Tuesday, during European trading hours, that the government is focused on reducing risks to Japan’s economy linked to the war in the Middle East. She said the administration will respond to economic conditions as the situation develops.
Katayama said it is important to maintain market trust and credit in the management of fiscal policy. She also said Japan has obtained the IMF’s understanding of its budget.
Energy Risk And Fiscal Credibility
She said Prime Minister Sanae Takaichi will speak on Tuesday with an oil-producing country. The aim is linked to the ongoing Middle East situation.
Asked about the need for an extra budget, Katayama said it is too early to discuss cost estimates because it is unclear how long the Middle East situation will last. She added that the government is not currently in a position to judge whether an extra budget will be needed.
Looking back at the administration’s statements during the 2025 Middle East conflict, the core issues of energy security and fiscal risk are still very much in play today. Japan’s reliance on imported energy remains a critical weakness, especially with WTI crude prices hovering around a volatile $105 per barrel. This sustained price pressure directly impacts our economic outlook.
The Yen has felt this pressure intensely, with the USD/JPY cross now trading near 175, a significant depreciation over the last year. This weakness is fueling domestic inflation, which has remained stubbornly above 3.5% for two consecutive quarters. Traders should consider buying volatility through options on the Yen, as any further government action or energy shock will cause large currency swings.
Equities And Volatility Hedging
This environment has also weighed on Japanese equities, with the Nikkei 225 still struggling to recover from the 10% correction we saw in late 2025. Corporate profit margins are being squeezed by these high energy input costs and uncertain global demand. Given the government’s continued uncertainty about needing an extra budget, hedging portfolios with Nikkei 225 puts or shorting futures remains a prudent strategy.
We have seen this pattern before, particularly when looking back at the oil shocks of the 1970s. Those events triggered significant inflation and economic slowdowns in Japan. This historical precedent suggests the current market is under-pricing the risk of a prolonged period of stagflation, making long-dated volatility derivatives potentially valuable.
