Energy costs are rising. Interest rates are rising. Raw material costs are rising. All three are happening at once, and all three trace back to the same chokepoint: the Strait of Hormuz, effectively closed since 28 February and still not reopened despite the 8 April ceasefire. In a country that imports 94.2% of its crude from the Middle East, there is no path to consumption growth while this persists.

This blog has been bullish on Japan: rising wages, the end of deflation, corporate governance reform. That broad view is not being abandoned. But the hope that the “new Japan” narrative extends to domestic consumption is not supported by the data. The structural reasons why Japan’s policy response is inadequate are explored in a companion piece, The Shrinkflation State. This article traces the macro data and its implications for corporate earnings.

The energy bill

Government electricity and gas subsidies expired on 1 April. Cumulative energy subsidies since 2022 reached ¥13.4 trillion. That buffer is gone. Utilities are passing through higher LNG procurement costs, with household electricity bills expected to rise by about ¥15,000 per month. Petrol is capped at ¥170 per litre through subsidies funded by government bonds, at a debt-to-GDP ratio of 235%.

On 16 March, Prime Minister Takaichi ordered the largest strategic reserve release since the system was established in 1978: 80 million barrels, covering 45 days of consumption. Reserves have fallen from 254 to around 230 days, with a second release under consideration for May. Subsidies have expired, reserves are being drawn down, and the strait remains shut.

The BOJ is tightening into a supply shock

The Bank of Japan held rates at 0.75% in March – the highest since 1995 – and Governor Ueda kept an April hike on the table. A former BOJ chief economist has endorsed a move at the 27-28 April meeting.

The BOJ’s logic: oil-driven CPI inflation validates the normalisation path, spring wage growth came in at 5.26% in Rengo’s first tally, and real rates remain deeply negative. The flaw in this logic is that cost-push inflation from a supply shock is not demand-pull inflation. Raising rates into it contracts demand without addressing the source. The BOJ made the same error in 2000 and 2006-07.

Raw materials are running short

Hormuz carries some 30% of global urea exports and 20-30% of ammonia. Japan’s acute pressure point is naphtha: 60-70% of Asian naphtha transits Hormuz, and Japanese producers hold only a few weeks of stock. Multiple petrochemical firms have cut production. Nissan and Toyota have trimmed output. Refinery utilisation fell to 67.7% of capacity in the week to 4 April.

On 13 April, TOTO – Japan’s largest bathroom fixtures manufacturer – suspended new orders for unit baths and system baths. The reason: a shortage of organic solvents derived from naphtha, used in the film adhesives and coatings applied to bathroom ceilings and walls. No restart date has been set. Takara Standard and Lixil issued similar warnings. TOTO’s shares fell 8.8%. You cannot buy a new bathtub in Japan because the glue that holds the ceiling panels together cannot get through the Strait of Hormuz.

Real wages cannot grow

Real wages fell 1.3% in 2025, the fourth consecutive annual decline. They briefly turned positive in January 2026 as inflation moderated, but with Brent already at $104 and subsidies expired, Dai-ichi Life Research warned that sustained oil above $100 would push real wages negative again for fiscal 2026. Nominal wage gains of 5% are meaningless if CPI runs above 3% and utility bills jump 10-30%.

Consumption is about 55% of GDP. If it stalls, growth depends on exports (margins compressed by energy costs, autos cutting production) or capital expenditure (constrained by labour shortages and rising material costs, as the BOJ itself acknowledges).

The most exposed G7 economy

The pain is global but the distribution is not. Goldman Sachs trimmed US 2026 GDP growth by 0.3 percentage points to 2.2% at $110 oil, with AI capex providing a $650 billion structural floor. The Fed is not raising rates. Europe’s LNG exposure is acute but it diversified supply routes after 2022.

Japan alone satisfies all three conditions simultaneously: the highest energy import concentration among advanced economies (94% from the Middle East, up from pre-2022 levels after cutting Russian supply), the only G7 central bank tightening and the least fiscal space at 235% debt-to-GDP. Zero Carbon Analytics ranks Japan’s supply disruption risk at 6.4 – the highest among major economies, against South Korea at 5.3 and China at 4.4.

The Takaichi government has moved aggressively on supply: reserve releases, non-Hormuz crude procurement, a $56 billion US energy deal, accelerated nuclear restarts. All on the supply side. The one demand-side tool that would make an immediate difference (a consumption tax cut) remains outwith her demonstrated reach.

The earnings revision cycle has barely begun

Pre-crisis consensus called for double-digit EPS growth for TOPIX in fiscal 2026. Janus Henderson expected double-digit earnings expansion. Bank of America targeted TOPIX 3,700 and Nikkei 55,500 by year-end. None of these forecasts incorporated a Hormuz closure or oil above $100.

The Nikkei has corrected more than 10% from its late-February record. But that was positioning-driven, not earnings-driven. The inflection came on 12 April: Bloomberg reported 113 earnings downgrades among TOPIX 500 companies in a single week, the first net-negative week since July. The Citi Earnings Revision Index for Japan fell to 0.16 from 0.42 in weeks. Some 40% of major chemical and materials companies have already cut their forecasts.

The second-order effects have yet to surface: utility cost pass-through to service margins, yen weakness amplifying import costs, demand destruction from the consumption squeeze. These will appear in late April and May when companies issue fiscal 2026 guidance. In 2008, Japan’s GDP contracted at an annualised rate of 12.1% and TOPIX fell 61% from peak. The Dallas Fed estimates that a three-quarter Hormuz closure would push oil to $132. In that scenario, double-digit EPS decline is realistic.

The market’s 10% correction has priced about a third of the likely earnings revision (author’s estimate). The rest arrives during guidance season.

Global investors have been bearish on Japanese consumption stocks for years. They were right. Within the “new Japan” narrative, some began to hope that rising wages and inflation would finally lift the consumer sector. The triple squeeze should put that hope to rest. Financial stocks have benefited from rate rises. Semiconductor equipment and defence run on global demand. But in a country where the population shrinks by 900,000 a year, real wages have fallen for four consecutive years, 94% of crude oil imports depend on passage through a strait that is closed, and input costs keep rising, there is no reason to turn bullish on stocks whose earnings depend on Japanese consumer spending.

Household consumption is 55% of GDP. It is the mould in the walls of the Japanese equity story. The triple squeeze may accelerate the spread. But even if Hormuz reopens tomorrow, the mould will not disappear. You can repaper the walls (subsidies). You can improve the ventilation (wage hikes). Until you fix the damp (MOF, consumption tax, population decline), the mould comes back. That is the reality of Japan’s consumer sector.

The structural reasons why consumption cannot grow go beyond the triple squeeze. They are explored in The Shrinkflation State.

— Gyokuro

This article is for informational purposes only and does not constitute investment advice. Investment decisions are the reader’s own responsibility.