Japan Stock Market Falls Amid Iran Crisis

According to Bloomberg News, after the U.S. and Israel launched strikes against Iran, market risk appetite cooled, and oil prices rose. On March 2, during the early trading session in Tokyo, Japanese stocks fell, with the Nikkei 225 Index dropping 1.8% and the Topix Index falling 2.2%. The stock prices of Japanese automobile, parts supplier, and electronics companies declined notably, with tire manufacturers such as Sumitomo Rubber Industries and Toyo Tire seeing their stock prices fall by more than 5%.

Image source: Toyo Tires

Market researcher Nobuhiko Kuramochi stated that as the Iran crisis continues to escalate, Japan's heavy reliance on Middle Eastern crude oil is likely to dampen stock market risk appetite, with sectors sensitive to oil prices, such as transportation, expected to suffer significant impacts.

In a report released on March 2, Citigroup analysts downgraded Japanese equities from overweight to underweight, citing that "the Japanese market tends to underperform during periods of rising oil prices."

Bank stocks exerted the greatest downward pressure on the TOPIX, with the Japanese banking index plunging as much as 6.3%—its largest decline since the sharp drop triggered by tariffs in April last year. Naoki Fujiwara, Senior Fund Manager at Shinkin Asset Management, noted that investor flight to safe-haven assets drove down yields on Japanese long-term government bonds, further weighing on Japanese bank stocks. He also stated that the bankruptcy of UK mortgage lender Market Financial Solutions over the weekend heightened “financial uncertainty” in European and U.S. credit markets, triggering a sell-off in bank stocks.

Japan Airlines Co. and ANA Holdings Inc. also plunged sharply, with both stocks falling more than 6% at one point. Andrew Jackson, Head of Japanese Equity Strategy at Ortus Advisors, wrote in a report: "War is always bearish for civil aviation, and high oil prices also dampen demand for air travel."

Meanwhile, in the oil and gas sector, the share prices of companies such as Inpex and Japan Petroleum Exploration Co., which are involved in refining and exploration, surged, helping to narrow some of the losses from the early session. Jackson noted that the conflict in Iran has caused "tremendous disruption" to the oil industry, which is a positive for Japanese refining companies as they hold large inventories of crude oil.