Region – implications of the war

Context: Why the Iran war matters for East Asia

• Asia’s heavy dependence on energy imports
• Importance of the Middle East
• Taiwan’s LNG exposure
• China as a relative outlier

Transmission channels to the economy

a) Inflation

• Already visible (e.g. China PPI rising)
• Input cost pressures building

b) Growth

• Not yet in hard data
• Weakening consumer sentiment (Japan, Korea)

c) Global channel

• Risk of export slowdown / recession
• Asia’s dependence on global demand

Key swing factor: Semiconductor / AI cycle

• Offsetting force vs energy shock
• Rising export prices (Korea, Taiwan, Japan)
• Terms of trade impact
• Critical question: does the AI cycle break?

Policy response

a) Price controls

• Fuel subsidies / price controls (Japan, Taiwan, Korea)
• Rough rule of thumb: ~1% GDP in subsidies → ~1ppt reduction in CPI

b) Fiscal policy for growth

• Fiscal space differs:
• Taiwan: high room
• Korea: moderate
• Japan: constrained

c) Monetary policy for inflation

• Likely inflation shock dominates (for now)
• Central banks may stay hawkish
• China is an exception (still dealing with deflation)

Market implications

• FX weakness (KRW, JPY initially)
• Rising bond yields (esp. Japan)
• Even with oil shock, KRW looks cheap

What to watch

• Ceasefire durability
• AI / semiconductor cycle
• Global growth trajectory
• Central bank reaction function