Industry starting to suffer from Middle East conflict

Shortages of naphtha resulting from the conflict in the Middle East are evoking the image of severe disruptions in Japan’s manufacturing sector as happened during the pandemic. With some countries in Asia rationing energy, shortages of some products can’t be ruled out. Nonetheless, it seems less likely that a regional bottleneck will trigger the same widespread disruption as global virus restrictions coupled with an unprecedented surge in global goods demand did during the pandemic. Our base case is that the economic hit will be limited and the rather hawkish signals delivered by the Bank of Japan this week support our view of a rate hike next month.