Both suffered double setbacks again! Amid the US-Iran conflict, why have Japan, South Korea, and other Asian stock markets become the biggest "victims"?

Question to AI: How will the Middle East tensions reshape the energy landscape in Asia?

Caixin News, March 23 (Editor: Bian Chun) On Monday, stock markets across the Asia-Pacific region fell sharply as threats of escalating hostilities between the U.S. and Iran raised investor concerns about the ongoing tensions in the Middle East. The stock markets in Japan and South Korea again became the hardest hit by sell-offs.

The KOSPI index in South Korea opened down 3.5%, with losses at one point exceeding 6%. As of the time of this report, it was down 4.71%, at 5457.13 points.

The Korea Exchange activated the KOSPI index circuit breaker after KOSPI 200 futures fell 5%, pausing algorithmic trading for 5 minutes.

In terms of heavyweight stocks, SK Hynix’s share price fell over 5%; Samsung Electronics and Hyundai Motor both saw their share prices decline by nearly 5%.

The Nikkei 225 index opened down 1.68%, at one point falling by over 2600 points. As of the time of this report, the decline was 3.35%, at 51582.23 points.

Japan’s TSE Growth Market 250 index futures triggered a circuit breaker, and the futures resumed trading at 9:40 AM local time.

Other stock markets also saw significant declines. As of the time of this report, Australia’s benchmark index, the S&P/ASX 200, was down nearly 1%; the Hang Seng Index fell by over 3%.

U.S.-Iran Confrontation Escalates

U.S. President Trump threatened last Saturday that if Iran does not fully reopen the Strait of Hormuz within 48 hours, he would “destroy” Iran’s power program. This “ultimatum” was met with a strong response from Iran.

According to CCTV News, on March 21 local time, President Trump posted on the social media platform “Truth Social” that if Iran fails to fully open the Strait of Hormuz within 48 hours without any threats, the U.S. will target various power plants within Iran and completely destroy them, with the largest one first in line.

In the early hours of the 22nd, Iran’s armed forces’ Khatam al-Anbiya Central Command warned that, based on previous warnings, if Iran’s fuel and energy infrastructure were attacked, all energy infrastructures, information technology systems, and desalination facilities of the U.S. and its allies in the region would become targets.

Additionally, Iran’s Islamic Consultative Assembly Speaker Ghalibaf stated on social media that if Iran’s power plants, energy, and oil facilities were attacked, then all such targets in the region would be considered legitimate targets and would face irreversible destruction, leading to a long-term increase in oil prices.

Why Are the Japanese and South Korean Stock Markets Most Affected?

In this U.S.-Iran conflict, the Japanese and South Korean stock markets have undoubtedly become the biggest “victims.” Whenever there are signs of escalation in the U.S.-Iran situation, the sell-offs in the Japanese and South Korean markets are the most severe.

Analysts believe the core reason is that Japan and South Korea are major oil and natural gas importers, and their energy imports heavily rely on the Strait of Hormuz. Tensions in the Middle East lead to soaring oil prices, drastically increasing the energy costs for both countries and heightening concerns about imported inflation.

Relevant data shows that over 90% of Japan’s imported oil comes from the Middle East, while about 70% of South Korea’s crude oil imports are from the region.

Goldman Sachs estimates that if oil transportation through the Strait of Hormuz is interrupted for 60 days, Japan’s economy will experience temporary contraction, a risk that has been closely monitored by the Bank of Japan.

Citibank recently predicted that given the worrying geopolitical situation in the Middle East, if oil prices remain high, South Korea’s GDP growth rate could decrease by nearly 0.5 percentage points by 2026.

Moreover, another significant reason for the strong reaction of the Japanese and South Korean stock markets in this U.S.-Iran conflict is that both markets are highly concentrated in energy/supply chain-sensitive leaders.

Analysts indicate that the shocks experienced by the Japanese and South Korean stock markets are related to both short-term impacts on the energy landscape and some specific characteristics of these markets. For instance, international capital accounts for a relatively high proportion of the Japanese and South Korean markets. When global geopolitical risks rise, international investors tend to reduce their risk exposure in these markets.

Additionally, the cyclical nature of these stock markets is relatively high, such as Japan’s automotive, machinery, and chemical industries, as well as South Korea’s semiconductor, shipbuilding, and petrochemical sectors. These industries are very sensitive to energy prices and global trade.

Since the outbreak of the U.S.-Iran conflict, both Japan and South Korea have taken several measures aimed at mitigating the impact of oil supply disruptions on the markets and the overall economy, such as Japan releasing record oil reserves and South Korea restarting its “oil price ceiling system” after 30 years.

According to the latest reports, Japan will use about 800 billion yen from its budget reserves to curb gasoline prices.

On March 22, South Korea’s Finance Minister Choo Kyung-ho urged the adoption of proactive policy measures during an interdepartmental meeting on the Middle East crisis to prepare for its long-term ramifications. Additionally, a spokesperson for the ruling party in South Korea indicated that the country would draft a supplementary budget of about 250 trillion won.

(Caixin News, Bian Chun)