How Oil Prices Impact the Japanese Economy: Evidence from the stock market

Oil prices increased 120% between 2020 and 2024. How do oil prices affect Japanese firms? Since Japan is an oil importer, oil price increases may act as a tax on Japanese firms. This would decrease their cash flows and stock prices. This paper examines how oil prices affect stock prices. Using Hamilton’s (2014) method to decompose oil prices into portions driven by aggregate demand and by oil supply, the results indicate that both demand- and supply-driven oil price increases raise Japanese aggregate stock returns. Aggregate demand-driven oil price increases benefit sectors that compete in global markets and harm sectors that depend on oil and sell to the domestic market. Supply-driven oil price increases benefit Japanese industrial firms that service the oil industry. These findings imply that, if the Japanese government wants to alleviate the burden of high oil prices, it should not provide blanket subsidies but target subsidies to sectors harmed by oil price increases.