Middle East conflict raises energy costs, Japanese corporate confidence deteriorates, and bankruptcy risks increase.

Japan's private think tank, Empire Data Bank, stated on Wednesday that the number of bankruptcy cases among Japanese companies in the 2025 fiscal year (ending in March 2025) reached 10,425, an increase of 3.5% from the previous year. This marks the fourth consecutive year of increase, with the number surpassing 10,000 cases for the second consecutive year. Due to the rising costs of the Middle East conflict squeezing profits, it is expected that bankruptcy cases may further increase starting from around the summer of this year, with a risk of an increase in bankruptcies in the 2026 fiscal year. Another government survey also showed that due to the uncertainty caused by the Middle East conflict casting a shadow over the economic outlook, the index measuring business confidence in March dropped from 48.9 in February to 42.2, a decline far exceeding market expectations. More alarmingly, another index reflecting business expectations for the next two to three months deteriorated from 50.0 in February to 38.7. In a survey report released by the Japanese government on Wednesday, it was pointed out that the economic recovery in Japan is showing signs of weakness due to the downward pressure brought about by developments in the Middle East situation. Analysis from Empire Data Bank highlighted that even before the escalation of the Middle East conflict caused by the U.S. and Israeli attacks on Iran on February 28, businesses were already facing dual pressures of high input costs and labor shortages. The surge in crude oil prices not only raised fuel and chemical product prices but also drove up prices of a wide range of commodities such as plastic products, construction materials, and fertilizers, intensifying concerns among businesses about rising input costs. The institution further warned that Japan may experience a wave of bankruptcies starting from around the summer, significantly increasing the likelihood of bankruptcy cases in the 2026 fiscal year. It is worth noting that this wave of bankruptcies shows a clear industry concentration, with the paint and related chemical industries being the worst affected by shortages of raw materials such as petroleum naphtha, with diluent prices soaring by as much as 80%, leading to a surge of 22.2% in bankruptcy cases in this industry. Meanwhile, the service and retail industries, which cannot easily pass on energy costs through price increases, are also deeply mired, with the number of bankruptcies in the restaurant industry reaching a record high of 3,585 cases. The above survey results are consistent with the quarterly report released by the managers of the Japan's central bank's regional branches on Monday, which emphasized that the surge in oil prices and supply chain disruptions caused by the Middle East conflict could harm the economy. The Bank of Japan will hold its next policy meeting on April 27-28, with the balance between the downside risks to economic growth and the ongoing inflationary pressures being a key consideration in deciding whether to raise interest rates.