Asian countries facing an oil supply emergency due to the Iran war are suffering a triple blow from a surging dollar and difficulties securing alternative crude from Russia and other sources. The purchasing power of currencies in Asian nations heavily dependent on Middle Eastern crude has diminished, effectively driving up the real cost of oil. With Russia's export capacity — seen as an alternative — declining by nearly 40%, finding substitutes has become increasingly difficult, while inflationary pressures are also rattling bond markets.
According to the New York Times (NYT) on Sunday, Asian countries have seen their real purchasing power decline as their currencies weakened against the dollar, which surged after the blockade of the Strait of Hormuz — a critical chokepoint for energy shipments.
Approximately 90% of international commodity trade in oil and gas is denominated in dollars. With 60% of Asia's total crude demand dependent on Middle Eastern sources, supply has been sharply curtailed — and the amount that can be purchased with the same money has also shrunk.
The value of the dollar against major Asian currencies has soared to its highest level in 20 years. As of closing rates on Sunday, the exchange rate stood at 159.47 yen per dollar for Japan, 1,502.23 won for Korea and 93.9750 rupees for India, levels comparable to the 2008 financial crisis. Citing experts on this double blow, the NYT noted that "this is expected to be more severe than the 'oil shocks' of the 1970s," adding that "many currencies are weakening at a time when purchasing power is needed most."
As the cost of energy — essential for production — has surged, the impact is spreading across Asian economies. In Japan, the yield on two-year government bonds, which are sensitive to the Bank of Japan's (BOJ) policy rate, exceeded the 1.32% level during intraday trading, hitting a 30-year high not seen since 1996, amid the weak yen.
To make matters worse, Russian crude — considered a key alternative — has also seen its transport capacity decline, with pipelines coming under attack from Ukrainian counteroffensives during the ongoing war.
Given these circumstances, the Japanese government is considering preemptive intervention in crude oil futures markets, the Nikkei reported. If actual intervention proceeds, the government could respond to high oil prices and the weak yen by placing large sell orders in the crude futures market using funds from the Foreign Exchange Fund Special Account. However, because this involves intervening in the futures market, the approach carries significant risks under current conditions, and concerns have been raised about potential market distortion. The Nikkei also reported that the Japanese government plans to lift operational restrictions on coal-fired power generation.
