Daiwa Asset: For every 10% increase in Brent crude oil prices, overall net profits of Japanese enterprises decline by 1-2%

How does rising oil prices impact Japanese corporate profits through dual channels?

The surge in oil prices is shaking the foundation of Japan’s stock market profit recovery. As conflicts in Iran escalate, Brent crude oil prices are over 50% higher than the average last year. Analysts warn that rising energy costs will significantly erode Japanese corporate profits.

On March 16, according to Bloomberg, Kazunori Tatebe, Chief Strategist at Daiwa Asset Management, stated that for every $10 increase in Brent crude oil prices, the overall net profit of Japanese companies will decline by 1% to 2%.

Currently, Brent crude is priced at about $104 per barrel, and since Japan relies almost entirely on imported oil, this level of prices places a heavy burden on its economy.

Shingo Ide, Chief Equity Strategist at NLI Research Institute, said, investors previously expected Japanese companies to achieve double-digit profit growth in the next fiscal year, but as oil prices soared sharply, the market is reassessing. The most optimistic scenario is a slowdown to single-digit growth, while the most pessimistic is a profit decline.

Analysts point out that this shift in expectations directly threatens the core logic behind the past six months’ 15% rise in the Topix index, which outperformed US, European, and Chinese markets, driven by fiscal stimulus expectations and corporate reforms.

Oil Price Shock: Direct Pressure on Japanese Corporate Profits

Japan is one of the world’s most oil-dependent economies, and fluctuations in energy costs directly impact corporate profits.

Daiwa Asset Management’s estimates show that a $10 increase in Brent crude oil prices results in a 1% to 2% decrease in Japanese corporate net profits. With Brent currently at about $104 per barrel—over 50% above last year’s average—corporate earnings are under considerable pressure.

Mamoru Shimode, Strategist at Resona Asset Management, warned that if the Iran conflict continues into April—when many Japanese companies will report full-year results—corporate management may adopt more conservative outlooks, further dampening market sentiment.

Notably, reports indicate that strong profit expectations have been one of the main supports for Japan’s stock market rally over the past six months.

During this period, the Topix index has risen 15%, outperforming major US, European, and Chinese indices. Fiscal stimulus and corporate reform efforts have also played significant roles, but profit growth prospects have always been the key driving force.

However, the sustained rise in oil prices is beginning to undermine this logic. Shingo Ide pointed out that market expectations for double-digit profit growth in the next fiscal year are gradually shifting toward single-digit growth or even profit declines.

In a report released Monday, SMBC Nikko Securities strategists Hikaru Yasuda and others further noted that industries expected to contribute significantly to profit growth in FY2026—such as electronics, transportation equipment, and banking—may simultaneously face dual pressures from a weakening US labor market and slowing AI data center investments. If profits in these sectors decline, the overall outlook for Topix earnings could be further downgraded.

Chain Reaction: Cost Transmission and Demand Contraction

Reports indicate that the impact of rising oil prices on Japanese companies extends beyond raw material costs.

Shingo Ide said, “It’s not just raw material prices rising; transportation costs will also increase, and a slowdown in the global economy could suppress demand.”

He added that Japan’s real wages, which just turned positive after 13 months, could fall back into negative growth if oil prices remain high. “All industries will find it difficult to remain unaffected.”

This means that oil price shocks will transmit through both cost and demand channels, impacting corporate profits and further affecting household consumption, creating broader economic pressures.

However, the reports also note that despite increasing risk signals, some strategists remain relatively cautiously optimistic about Japanese corporate profit prospects.

Shoji Hirakawa, Chief Global Strategist at Tokai Tokyo Intelligent Laboratory, pointed out that historically, sharp declines in the stock market triggered by oil prices usually occurred when crude doubled in price and the Federal Reserve was raising interest rates simultaneously.

“Currently, oil prices are about 50% higher year-over-year, and demand remains robust. It’s unlikely that Japanese corporate profits will reverse their upward trend at this point.”

Nomura Securities predicts that if the year-over-year increase in crude oil prices remains between 20% and 30% by the fiscal year ending March 2027, the expectation of double-digit profit growth for Japanese companies can still be maintained.