FY2026 Report: Challenges of a Full-Scale Shift to a Growth-Oriented Economy | Chapter 1Crude Oil Prices, Japan’s Prices and Wages Amid Middle East Tensions

At the end of February 2026, an exchange of attacks between the United States and Israel and Iran triggered increases in the prices of crude oil, naphtha, LNG, coal and other commodities. Combined with exchange rates moving toward a weaker yen, this pushed up import prices, particularly for petroleum, coal, natural gas and chemical products.

In May 2026, consumer price inflation was 1.5% overall, 1.4% for the core index and 1.8% for the core-core index. Slower increases in rice and food prices, along with measures to ease electricity and gas charges, restrained the growth rate.

Emergency measures to mitigate sharp fluctuations in fuel oil prices kept gasoline retail prices broadly at pre-escalation levels. Meanwhile, chemical products derived from naphtha are widely used in products such as paint and plastic bags, creating upward pressure on retail prices, including those of essential goods.

Higher crude oil and petrochemical product prices are more likely to affect small and medium-sized enterprises, whose financial foundations are relatively weaker. Small and medium-sized enterprises and small business operators employ approximately 70% of employees, and their wage increases are important for overall wage growth and improving people’s purchasing power.

The Japanese government gradually released oil from its stockpiles and expanded procurement sources beyond the Middle East and the United States to Latin America, the Asia-Pacific region, Central Asia and Africa. Procurement progressed from approximately 25% of the required amount in April, to approximately 60% in May, approximately 80% in June and approximately 100% in July.

In FY 2026, wage increases reached approximately 5% year on year including regular raises, the base-up increase was in the mid-3% range, and hourly wages for short-time workers and others rose by more than 6% year on year. Total cash earnings increased by approximately 3% year on year, and real wages also turned positive.

Although Japan is not in a deflationary situation, determining whether it has overcome deflation requires a careful comprehensive assessment of underlying price trends, the GDP gap, unit labor costs, corporate price pass-through, and households’ and companies’ expected inflation rates.