By Toma Mochizuki and Ayano Shimizu,
Russia's military buildup around Ukraine's border is stoking fears about its potential impact on the economy of import-reliant Japan amid speculation a Russian invasion may further pressure elevated crude oil and commodity prices.
The Ukraine crisis has also brought uncertainties to Tokyo's stock market, with some brokers expecting a Moscow-led offensive to send the benchmark Nikkei Stock Average below the 26,000 mark from recent levels of around 27,000.
The United States and allies have warned Russia that they will impose sanctions in the event of an incursion, a development that could prompt Moscow to cut gas, oil and other energy supplies in retaliation and spur inflation.
"The geopolitical tensions are attributable to recent rises in commodity prices as well as inflation," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.
"Japanese companies' profit margins could narrow, as it is challenging for firms to greatly raise prices to make up for increasing costs," Fujito said. "The Ukraine crisis may force some companies to revise downward their profit outlook for fiscal 2022 starting in April."
While President Joe Biden and other top U.S. officials have not ruled out imminent Russian military action on Ukraine, analysts are watching whether a planned meeting between U.S. Secretary of State Antony Blinken and Russian counterpart Sergey Lavrov on Thursday could lower tensions over Ukraine.
In a meeting Saturday in Munich, foreign ministers from the Group of Seven nations of Britain, Canada, France, Germany, Italy, Japan and the United States expressed opposition to any attempt to alter the status quo in Ukraine by force and urged Russia to address the crisis through diplomatic means.
Propelled by the standoff between the West and Russia, Middle East crude oil futures briefly hit 62,920 yen ($550) per kiloliter at the Tokyo Commodity Exchange on Feb. 14, the highest level since October 2014.
Gasoline prices in Japan have also been rising for six consecutive weeks in tandem with heightening geopolitical tensions.
In an effort to keep prices of gasoline, diesel oil, kerosene and fuel oil from sharply rising, Prime Minister Fumio Kishida's government introduced an oil industry subsidy program for the first time last month.
However, the Petroleum Association of Japan believes oil prices will rise to higher levels in the event of a Russian invasion of Ukraine, calling for the government to introduce additional measures to cushion a potential impact on markets and the economy.
Although Japan imports just 4 percent of its crude oil from Russia, Tsutomu Sugimori, head of the association, said, "Around 10 percent of the world's crude oil comes from Russia. Therefore the impact on prices will be extensive if supply becomes limited due to a suspension in trade."
Given that Ukraine is a leading producer and exporter of grains including wheat and corn, a Russian invasion of the country may impede farm supplies to the world.
Approximately 70 percent of land in Ukraine is used for agriculture, according to World Bank data.
"Japanese companies are expected to be hit directly by the climb in commodity prices, as the country relies heavily on imports for crude oil and wheat," Fujito said.
Nissin Food Products Co., a maker of Cup Noodle and other instant noodle products, announced earlier this month it will raise prices on around 180, or roughly 70 percent, of its products by 5 to 12 percent from June 1.
"We have endeavored to cut costs where we can," the company said in a press release. "But we have made the inevitable decision to revise the prices of our products...in a situation that prevents us from absorbing rising costs on our own."
Maki Sawada, a strategist at Nomura Securities Co.'s investment content department, said, "As companies have been conducting price hikes since last year, further increases may also lead to a reduction in household spending."
Sawada, however, said that despite the potential impact of the Ukraine crisis on the Japanese economy, people may be prompted to spend more money in the next few months because an increase in COVID-19 cases during the current wave of infections appears to have peaked.
