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MARCH 2026

By Q4, inflation eased to 3.7 per cent, suggesting reduced policy stance, by slashing monetary policy rates by 10
impact of wage growth, energy tariffs and services basis points (cumulative) and lowering the reserve
inflation. requirements, to support domestic demand. Despite
policy rate cut, inflationary pressures remained muted in
Inflation in Japan increased from 2.7 per cent in 2024 to the third quarter at –0.2 per cent, indicating persistent
3.3 per cent in 2025, due to imported energy costs and deflationary tendencies despite stable export activity.
higher wages. Inflation in 2025 moderated steadily By Q4, inflation rose modestly to 0.6 per cent, suggesting
throughout the year, decelerating from 3.8 per cent in Q1 early signs of stabilization as policy support and
to 2.7 per cent in Q4, reflecting easing import costs, improving consumption demand began to lift prices.
stabilizing energy prices and resilient domestic demand.
Despite this moderation, inflation remained near the Bank IMF (in World Economic Outlook Update, January 2026)
of Japan’s target of 2 per cent, prompting it to begin a initially expected global energy prices to decrease driven
gradual tightening of monetary policy, after adopting easy by increase in oil supply by OPEC+ and a tepid global
monetary policy for decades. Japan kept policy rates demand, before the beginning of the West Asia crisis.
stable during the first half of 2025, while inflation However, large scale disruptions due to the West Asia
continued to steadily moderate, albeit at a slower rate in crisis have led to an increase in energy prices, lowered
the second half of 2025. It raised policy rates by 25 basis global demand, disrupted trade, among others, putting
points in the last quarter of 2025. upward pressure on prices. In the World Economic
Outlook, April 2026, the IMF expects global headline
Inflation in China remained subdued at near-zero levels inflation to increase to 4.4 per cent in 2026. However,
through most of 2025, moving from –0.1 per cent in the persistent geopolitical tensions in West Asia could
first quarter to zero per cent in the second quarter, skyrocket global crude oil prices, creating considerable
reflecting weak domestic demand and continued stress in upward risks for overall inflation. This is a key monitorable
the property sector. In the first half of 2025, the Central metric for 2026 as rising energy prices will have
Bank in China adopted an accommodative monetary important ramifications for the global markets.

The Unfolding West Asian Crisis

Escalating geo-political tensions in the West Asia, involving Iran, Israel and the US, have renewed concerns
over disruptions in the global economy, specifically energy supply chains and trade routes. The Gulf region
accounts for nearly one-third of global oil production and over one-fifth of global LNG exports, making it
central to global energy supply. The Strait of Hormuz is a critical chokepoint located between Iran and
Oman, connecting the Persian Gulf to global markets. In mid-2025, it managed around 20 mbpd (million
barrels per day) of crude and petroleum products (around one-fifth of global oil consumption) amounting to
around US$600 billion in annual energy trade, handling passage of an average of 144 ship transits (including
tankers, container ships and bulk carriers) per day. It is also a key trading route for other industrially
important chemicals like helium, chemical sulphate, and urea (a key input in fertiliser production).

In Asia, China, India, Japan and South Korea accounted for about 69 per cent of the crude flows through the
Strait of Hormuz in 2024. For LNG, China, India and South Korea absorbed around 52 per cent of total
volumes. This implies that even temporary disruptions to Hormuz would disproportionately affect Asian
economies, severely impact global energy and shipping markets, and have outsized economic effects.
Disruptions to shipping can raise insurance premia, tighten tanker availability, and constrain effective oil
supply even if production is restored to pre-war level.

While Saudi Arabia and the UAE operate pipelines bypassing the Strait, the available spare capacity in these
pipelines is estimated at only about 2.6 mbpd, around 13 per cent of oil passing through Strait. Other major
exporters such as Iraq, Kuwait and Qatar don’t have the infrastructure to export bypassing Strait of Hormuz.

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