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

Oil prices soaring are shaking the foundation of Japan’s corporate profit recovery. As the conflict in Iran continues to escalate, Brent crude oil prices are over 50% higher than the average last year. Analysts warn that rising energy costs will significantly erode profits for Japanese companies.

On March 16, Bloomberg reported that Kazunori Tatebe, Chief Strategist at Daiwa Asset Management, stated, “For every $10 increase in Brent crude oil prices, Japan’s overall net profits will decline by 1% to 2%.”

Currently, Brent crude is about $104 per barrel, and since Japan relies almost entirely on imported oil, this price level poses a heavy burden on its economy.

Shingo Ide, Chief Equity Strategist at NLI Research Institute, said, “Investors previously expected Japanese corporate profits to grow by double digits in the next fiscal year, but with the sharp rise in oil prices, the market is reassessing. The most optimistic scenario is a single-digit growth, while the most pessimistic is a profit decline.”

Analysts point out that this shift in expectations directly threatens the core logic that has driven the Topix index up 15% over the past six months, outperforming U.S., European, and Chinese markets.

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 at about $104 per barrel—over 50% higher than 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.

It is noteworthy that reports indicate 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 rose 15%, surpassing major indices in the U.S., Europe, and China. Fiscal stimulus expectations and corporate reforms also contributed, but profit growth prospects have always been the key driving force.

However, the sustained rise in oil prices is challenging 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 face dual pressures from a weakening U.S. 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 Pass-Through 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 turned positive after 13 months, could fall back into negative growth if oil prices remain high. “Widespread industries will find it difficult to remain unaffected.”

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

However, the report also notes 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 stock market declines triggered by oil prices usually occur when crude doubles and the Federal Reserve raises 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 crude oil prices increase by 20% to 30% year-over-year by March 2027, the expectation of double-digit profit growth for Japanese companies could still be maintained.

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