Japan’s economy could face serious supply disruptions and weakening demand due to the ongoing Iran war, a risk the Bank of Japan (BOJ) may be overlooking by focusing too heavily on inflation, former central bank official Nobuyasu Atago warned on Thursday.

Recent hawkish signals from the BOJ have led markets to price in about a 70% chance of an interest rate hike in April, driven by rising oil prices and higher import costs caused by a weak yen. Although the central bank kept rates unchanged in March, policymakers debated further tightening to address inflation concerns.

However, Atago cautioned that the greater threat lies in potential supply shocks—particularly a shortage of naphtha and other petroleum-based chemical products essential for industrial production.

“Like a natural disaster, this crisis could severely disrupt the flow of goods rather than simply push prices higher,” said Atago, now chief economist at the Rakuten Securities Economic Research Institute.

He argued that the BOJ should prioritize measures to support the economy, including injecting liquidity into markets, instead of focusing solely on rate hikes.

Global markets have been unsettled since the Iran conflict effectively shut down the Strait of Hormuz, a key route for nearly a fifth of the world’s oil and gas supply. The disruption has driven crude prices higher and intensified concerns for import-dependent countries like Japan.

Naphtha, a critical feedstock for petrochemical production, is widely used to produce materials such as plastics and synthetic fibers. A shortage could significantly impact factory output and broader economic activity starting this quarter, Atago said.

While official data showed Japanese manufacturers expected output to rise by 3.8% in March, Atago believes actual production may decline, as the forecast did not account for the war’s impact.

He also warned that any government measures to curb fuel consumption could dampen demand during Japan’s peak travel season beginning in May.

“Japan may face stagflation this summer, with rising prices and a weakening economy occurring at the same time,” Atago said.

Although the BOJ is likely gathering data from regional offices on how industries are coping, Atago suggested such information may not be enough to shift the stance of policymakers focused on macroeconomic indicators.

“In times like this, policymakers need to listen closely to businesses and people on the ground,” he said, adding that institutions like the BOJ are often less responsive to such real-time economic pressures.