Nikkei slides on Iran oil worries; BOJ expected to hold, hike twice in 2027

Near term, crude is the biggest threat to Japanese assets. Because Japan relies heavily on imported energy, any additional increase in oil linked to the Iran standoff would squeeze company margins and the trade account, while leaving the yen weak around 157 per dollar. A prolonged advance in oil prices would also feed through to imported inflation, making it harder for the BOJ to stay on hold and possibly dragging expectations for a hike earlier than January. Since a pause is already fully reflected in prices, the yen and Japanese government bond yields may respond to the BOJ's guidance more than to the actual decision; a hawkish tilt could give the yen a lift. Semiconductor and other technology shares are still the market segment most exposed to risk-off moves generated by Middle East news.

Shares in Tokyo are being driven by Middle East news flow and crude prices, while the Bank of Japan is widely expected to leave policy untouched this week and hold its next adjustments for the new year.

Summary:

• The Nikkei Stock Average slid roughly 0.5%, trading near 62,400, with chips and electronics leading the drop as Iran tensions and costlier energy weighed.
• Advantest declined 1.7%, Murata Manufacturing lost 1.0%, and the dollar stayed near 157 yen, barely moved from Friday's Tokyo close.
• Crude reached a five-month peak on Friday, keeping investor attention fixed on the Middle East and oil markets.
• ING forecasts that the Bank of Japan will keep its policy rate at 1.25% at this week's meeting while it weighs last month's hike; the bank then sees two 25bp moves in January and April 2027, bringing the rate to 1.75%.
• Policymakers, in ING's view, could prefer additional time to watch the economy, especially while government measures to support domestic demand remain in place; that leaves the emphasis on the BOJ's tone and communication.
• Tokyo's October CPI is seen showing headline inflation unchanged and core inflation a bit softer; September data for retail sales and industrial production are also scheduled.

Japanese equities fell on Monday, with tech names taking the largest hit, as concerns over the Iran conflict and higher energy prices kept a cloud over sentiment.

The Nikkei Stock Average declined roughly 0.5% to about 62,400, with semiconductor and electronics issues leading the slide. Advantest, a maker of chip testing gear, fell 1.7%, and Murata Manufacturing, an electronic components supplier, slipped 1.0%. On the currency side, the dollar was around 157 yen, largely unchanged from Friday's Tokyo stock close.

With oil having touched a five-month high on Friday, investors remain focused on Middle Eastern events and crude. Because Japan depends on imported energy, expensive oil pushes up costs for companies and consumers, and traders are unlikely to drop their guard until the path of the conflict becomes clearer.

On monetary policy, ING economists expect the Bank of Japan to leave its policy rate at 1.25% when it meets this week, as officials assess the impact of last month's increase. The firm's base scenario includes two additional 25 basis point increases, in January and April 2027, taking the policy rate to 1.75%.

Inflation is still high, ING observed, but policymakers might opt for more time to study the economy, especially with government backing for domestic demand continuing. Since a pause is already priced in, the bank said the market's focus will be on the BOJ's message and a new batch of indicators.

The lineup includes October Tokyo inflation numbers, where ING cites consensus for headline CPI to stay flat on the year and core inflation to dip a little. September national retail sales and industrial production will also be published. Combined, the BOJ's guidance and those figures will probably determine how quickly investors expect the next increase.