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The decision marks a further escalation in Japan’s energy contingency response at a time when the Strait of Hormuz remains under severe strain despite a two-week ceasefire between the United States and Iran. The waterway is one of the world’s most important oil chokepoints, and its disruption has hit Japan especially hard because the country depends on the Middle East for about 95% of its oil imports. Takaichi’s government has been racing to prevent shortages, stabilise prices and reassure refiners, transport operators and households that fuel will continue to flow.

Tokyo had already moved ahead on March 16 with the release of reserves equivalent to 50 days of consumption, combining privately held stocks with state reserves and supplies jointly held with producing nations. That initial step was announced before a formal coordinated action by the International Energy Agency, underscoring the urgency felt by Japanese officials as tanker traffic through Hormuz became severely constrained. The new plan adds another layer of insurance rather than replacing the earlier programme, signalling that authorities believe the market shock may last longer than first expected.

Officials say Japan still has considerable room to act. As of April 7, the country held reserves covering 228 days, including 143 days in the public stockpile. That buffer gives policymakers flexibility, but it also reflects the scale of the threat they see. Refiners have already been forced to adjust operations as crude availability tightens, and the government is attempting to manage not only total supply but also how fuel is distributed across the country. Concerns have centred on keeping essential sectors supplied first, particularly healthcare, transport, agriculture, fisheries and livestock production.

Japan’s strategy goes beyond drawing down reserves. Takaichi said the government expects that by May more than half of oil imports will be secured through routes that do not involve the Strait of Hormuz. That shift is central to Tokyo’s effort to avoid becoming hostage to a single maritime corridor while conflict risk remains elevated. Officials have not identified every supplier publicly, but the Ministry of Economy, Trade and Industry has indicated that Japan is seeking alternative barrels from a wide range of countries, including Malaysia, Azerbaijan, Brazil, Nigeria and Angola.

The United States is set to play a larger role in that reshaping of supply. A ministry document cited by Reuters said oil imports from the US in May would be four times higher than a year earlier. Japan imported about 189,000 barrels a day from the US in May last year, equal to roughly 8% of total crude purchases for that month. Tokyo is also drawing on Middle East supplies that can bypass Hormuz, including shipments from Saudi Arabia’s Red Sea outlet at Yanbu and from Fujairah in the United Arab Emirates. Those routes do not eliminate vulnerability, but they reduce reliance on the narrow strait at the centre of the crisis.

Domestic politics and inflation pressures are also shaping the response. Takaichi has paired the reserve releases with fuel price measures meant to keep retail gasoline around a nationwide average of ¥170 a litre, even if crude prices remain elevated. Officials have warned that a prolonged supply shock could otherwise push pump prices much higher and strain households as well as businesses already dealing with cost pressures. Finance Minister Satsuki Katayama has also flagged the fiscal burden of existing subsidy measures, suggesting that energy security is becoming not only a supply issue but a budgetary one.

The backdrop is a bruising spell for the rupee. The currency sank to record lows in March as conflict-linked fears over energy supplies drove oil prices higher and triggered capital outflows from domestic assets. That slide left the central bank confronting a familiar dilemma: allow the exchange rate to absorb the shock or step in more forcefully to curb disorderly moves in a country heavily exposed to imported crude. Reuters reported that the rupee hit a record low around mid-March before the Reserve Bank stepped up support measures as traders fretted over the growth and inflation fallout from elevated oil prices.

Against that backdrop, the central bank moved on March 27 to tighten rules around banks’ foreign-exchange exposure. It imposed a $100 million cap on net open dollar-rupee positions in the onshore market and restricted banks’ ability to deal in non-deliverable forwards, measures aimed at curbing arbitrage between local and offshore markets that officials believed had become destabilising. Governor Sanjay Malhotra has since said the steps were temporary rather than a long-term retreat from market development or rupee internationalisation, but the regulatory intent was clear: volatility linked to rapidly expanding positions would no longer be tolerated.

Bloomberg reported on Sunday that a senior Reserve Bank official criticised market makers for aggravating the rupee’s weakness during the Middle East tensions, reinforcing the view that policymakers see some trading strategies not merely as opportunistic but as harmful to market functioning. Bloomberg had earlier quoted Deputy Governor T. Rabi Sankar as saying the arbitrage build-up led to an “artificial drying up” of dollar supply in the market, affecting prices. That language is notable because it suggests the regulator believes the issue went beyond normal speculative behaviour into a form of distortion that reduced liquidity when it was needed most.

Market participants have broadly accepted that the positions were sizeable. Reuters, citing industry estimates and clearing data, said consensus had settled around roughly $40 billion of arbitrage exposure, much of it built across the onshore and non-deliverable forward markets. By early April, banks had exited the bulk of those trades ahead of the Reserve Bank’s April 10 deadline. Clearing house data pointed to around $36 billion in NDF trades between April 1 and April 7, seen largely as part of the unwind. That process helped support the rupee at points, but it also created other distortions, including sharp moves in forward premiums and strained hedging conditions for importers.

For companies exposed to foreign-currency liabilities, the clean-up has been costly. Reuters said one-year dollar hedging costs jumped sharply, at one point posting the steepest rise since the global financial crisis, as importers rushed to lock in cover and market liquidity thinned. That matters because the regulatory cure, while aimed at curbing speculative pressure, can tighten financing and risk-management conditions for genuine commercial users. It is one reason some dealers have privately argued that while the central bank was justified in tackling excessive positioning, abrupt curbs can deepen dislocations in a market that depends on continuous two-way activity.

Still, the Reserve Bank appears willing to accept short-term disruption in exchange for regaining control of the policy signal. The rupee rallied through parts of early April as arbitrage positions were unwound and a temporary US-Iran ceasefire drove oil lower, with the currency at one stage strengthening into the 92-93 range against the dollar. Yet that recovery proved fragile. On April 9, the rupee slipped again as doubts over the truce resurfaced, Brent crude rebounded and wider risk sentiment weakened. For policymakers, that sequence underscored how quickly external shocks can overwhelm domestic market plumbing if positioning is allowed to build unchecked.

Broader lessons are now emerging for the financial system. One is that India’s increasingly connected currency market, spanning domestic forwards, exchange-traded futures and offshore NDFs, can improve price discovery in calm conditions but amplify stress when geopolitical shocks hit. Another is that the Reserve Bank remains prepared to intervene not only through spot-market support but also through conduct-based regulation when it thinks market behaviour is aggravating weakness. That stance may temper speculative excess, but it also raises questions about how much freedom banks will have to intermediate risk in future episodes of volatility.

The ratings agency said elevated oil prices are likely to widen the current-account deficit this year and weaken external buffers, even as it still expects the economy to expand at a healthy pace and the fiscal deficit to narrow over the next two years. S&P projected growth of 5.8% in 2026 after the economy expanded 4.4% in 2025, with softer momentum in the first half and a rebound later in the year.

The decision lands at a delicate moment for Manila. The Bangko Sentral ng Pilipinas warned this week that higher fuel costs were already feeding into broader prices after March inflation accelerated to 4.1%, above the central bank’s 2% to 4% target band and sharply higher than February’s 2.4%. Transport costs were the main driver, with diesel prices up 59.5% from a year earlier and gasoline up 27.3%, while core inflation also edged higher, suggesting second-round effects may be starting to build.

That inflation pulse helps explain why S&P has become more cautious. A country that depends heavily on imported fuel is especially exposed when conflict disrupts Middle East energy flows, and the Philippines has been among the Asian economies hit hardest by the latest oil shock. Reuters reported that Brent crude had risen 55% since the Iran war began on February 28, while the Philippine peso slid to record lows against the dollar, adding another layer of imported inflation pressure.

The external vulnerability is not new, but the conflict has made it harder to ignore. Philippine officials have been scrambling to secure energy supplies, including seeking assurances over safe passage for Philippine-flagged ships and fuel cargoes through the Strait of Hormuz. Manila has also explored alternative sources of crude and emergency measures to protect domestic supply, underlining how quickly a geopolitical crisis can turn into a ratings issue for an energy-importing economy.

For investors, the key point is that S&P did not cut the rating itself. The agency kept the BBB+ grade in place, indicating that it still sees underlying strengths in the economy, including growth potential, remittance support and expectations of gradual fiscal repair. That distinction matters. An outlook change signals rising risk over the medium term, but it is not the same as a downgrade, and it leaves room for the sovereign to stabilise if external pressures ease and macroeconomic management holds firm.

Still, the downgrade in outlook will sharpen attention on the government’s fiscal path. The Philippines has already lowered its medium-term growth targets to reflect the impact of Middle East tensions and shifts in US trade policy. Official forecasts now put 2025 growth at 5.5% to 6.5%, down from 6% to 8%, while targets for 2026 to 2028 have been narrowed to 6% to 7%. That softer growth backdrop makes deficit reduction harder, particularly if the state is forced to spend more on fuel relief, transport support or other measures to cushion households and businesses.

There are signs, however, that the fiscal picture is not uniformly worsening. Treasury data showed the budget deficit in February narrowed marginally from a year earlier, while year-to-date figures improved sharply because of stronger revenues and earlier remittance of dividends. S&P’s own statement suggests it still expects fiscal metrics to improve, even if the war has made that path more vulnerable to setbacks.

Beyond the government balance sheet, the social cost of the energy spike is becoming harder to miss. Reuters reported that some farmers in Benguet province were abandoning harvests because higher fuel, labour and transport costs made it uneconomic to bring produce to market. That kind of strain matters for credit analysis because it shows how an oil shock can move from shipping lanes and currency markets into household spending, food supply chains and political pressure for intervention.

By Asad Mirza It seems that President Trump’s Tuesday morning Truth Social post, which threatened “a whole civilisation will die tonight” and raised the spectre of nuclear war, has jolted the American lawmakers, and it has begun a chorus of calls either for Trump’s impeachment or for his removal via the invocation of the 25th […]

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