South Korea and Japan Bear Brunt of Stock Sell-Off as Iran War Drives Energy Crisis

Seoul's Record Fall Reveals Asia's Exposure

South Korea's Kospi suffered its worst single-day decline in history in early March, plunging more than 12% as the war with Iran drove up energy costs and shook confidence in economies dependent on imported fuel. Billions in market value disappeared within hours, and circuit breakers halted trading across futures markets. By March 17, the crisis had spread from stock exchanges to petrol stations, currencies and government budgets.

The United States and Israel launched military strikes against Iran on February 28. Since then, Japan's Nikkei 225 has fallen nearly 9%, European benchmarks have lost approximately 7%, and US stocks have declined around 3.6%. South Korea's market decline since February 28 was also put at 12%, alongside the record daily fall of more than 12% in early March.

Seoul's collapse was the sharpest among major global stock exchanges during the conflict. South Korea's technology-heavy Kosdaq fell 14%, forcing trading halts, while Samsung Electronics and SK Hynix lost roughly 20% of their market value compared with before the war. The two semiconductor companies had recently surpassed the combined market value of China's major technology firms, helped by demand for artificial intelligence.

Tokyo also experienced a severe daily shock: the Nikkei fell 5.2% in one session, with the broader Topix falling as well. Investors were weighing how sustained increases in energy costs could squeeze manufacturers' profits. Countries that import much of their fuel faced larger losses, while domestic energy production gave other economies a cushion.

Why Oil Imports Make the Shock Worse

Morgan Stanley's figures show the scale of Asia's exposure. The region's oil and gas trade deficit amounts to 2.1% of gross domestic product, compared with 1.5% in Europe. A trade deficit here means that the value of energy imports exceeds energy exports. Expressing it as a share of GDP shows the size of that gap relative to the economy.

South Korea has the largest exposure among the major economies listed, with an energy trade deficit equivalent to 4.3% of GDP. Japan's deficit is 2.7%, while China's is 1.8%. South Korea's figure is more than twice Asia's 2.1% average. Germany, despite its large industrial economy, has an energy deficit equivalent to 1.5% of GDP.

South Korea imports virtually all its crude oil, with approximately 70% coming from Middle Eastern suppliers. Japan relies on Gulf producers for roughly 90% of its oil needs. Higher prices therefore reach deep into both economies, increasing the cost of producing goods for export as well as supplying households with fuel.

Iran's effective blockade of the Strait of Hormuz in early March intensified those risks. The shipping route handles roughly 20 million barrels a day and 25% of all seaborne petroleum trade. The disruption was also estimated at 20% of global seaborne oil trade. South Korea, Japan, China and India together account for roughly 75% of oil flows through the chokepoint.

Ray Sharma-Ong, deputy global head of multi-asset bespoke solutions at Aberdeen Investments, described how energy exposure and investors' retreat from risk were combining to push regional stocks lower.

Equity markets in Japan, Korea and Taiwan have sold off sharply as investors reacted to higher oil prices and geopolitical uncertainty. These economies are net energy importers, which partly explains the negative market reaction. The sell-off also reflects a risk-off rotation out of cyclical sectors into defensive assets.

Cyclical sectors depend heavily on economic growth and spending. A shift toward defensive assets means investors are seeking holdings they expect to be more resilient when business conditions deteriorate. For Asian manufacturers, the immediate concern is that dearer energy will reduce profit margins while uncertainty weakens demand.

South Korea Caps Fuel Prices and Supports Markets

President Lee Jae Myung announced South Korea's first fuel price caps in nearly three decades. Wholesale petrol prices would be capped at 1,724 won per liter and diesel at 1,713 won per liter during an initial stabilization period of two weeks.

Seoul's average gasoline price had already crossed 1,900 won per liter, a level unseen in four years. Motorists rushed to fill their tanks before further increases, producing panic buying across the country. The caps target wholesale prices, the prices charged before fuel reaches consumers at the pump.

South Korea launched a broader market stabilization program worth 100 trillion won on March 6. Lee stressed that authorities should prevent markets from becoming dysfunctional while avoiding artificial intervention that distorts share prices. The government was trying to keep financial markets operating through the shock without deciding what stocks should be worth.

South Korea also announced that it would release 22.46 million barrels of oil, equivalent to nine days of domestic demand. The release forms part of a coordinated International Energy Agency effort to make 400 million barrels available globally from emergency reserves.

Lee's administration began examining supply routes that avoid Hormuz, including potentially increasing imports from Brazil and Norway. Such diversification could take months or years to put into practice effectively. Emergency stocks can provide oil sooner, while changing suppliers requires a longer adjustment.

South Korea has also announced plans for a supplementary budget of 10 trillion to 20 trillion won to support household welfare and economic recovery. That proposed spending addresses a different part of the crisis: the strain on people and businesses as fuel costs rise and economic activity comes under pressure.

Japan Relies on Reserves and Subsidies

Japan authorized the release of 80 million barrels of oil, described as equivalent to 15 days of domestic consumption. Its emergency stockpiles cover 254 days of demand, giving the government a substantial reserve to draw upon as shipments through the Gulf face disruption.

Prime Minister Sanae Takaichi resisted calls to overhaul the fiscal 2026 budget under parliamentary review. Her government instead relied on existing subsidy mechanisms to cushion oil refiners against price volatility and moderate the costs reaching consumers.

Japan's response differs from South Korea's direct controls on wholesale fuel prices. Tokyo is using public money and stored oil to soften the shock while retaining market pricing. Seoul is combining reserves and financial support with a ceiling on specified wholesale prices.

Vietnam eliminated fuel import taxes entirely to help secure energy supplies. Other economies in the region were also exploring emergency measures. Across these responses, governments were seeking to limit immediate price pressure and maintain access to fuel while normal shipping remained disrupted.

China and Energy Exporters Find Buffers

China's CSI 300 has declined less than 1% since hostilities began, making it the best-performing major equity benchmark during the crisis. Its relative stability contrasts with the much larger falls in South Korea and Japan, even though China is the world's largest oil importer.

Beijing has several buffers: extensive domestic renewable energy installations, significant oil stockpiles, more domestic energy production than its neighbors, and diversified supply relationships. China can also substitute coal for some energy needs. Those options give it more room to absorb disruption than economies with fewer domestic alternatives.

An oil crisis could still cause China substantial economic pain. Its stronger buffers, however, could improve Beijing's position relative to regional rivals facing greater pressure from imported energy costs. China's energy trade deficit of 1.8% of GDP is smaller than South Korea's 4.3% and Japan's 2.7%.

The United States has experienced a relatively modest stock decline of around 3.6%, despite its direct military role in the conflict. As a net energy exporter, it has domestic energy companies that benefit from higher prices. Their gains can partly offset losses in sectors that consume fuel, helping explain the S&P 500's smaller decline compared with Seoul's double-digit fall.

Europe's approximately 7% market decline sits between the US and the hardest-hit Asian markets. Lower energy intensity than Asia's manufacturing hubs has provided some protection, although Germany's industrial economy remains exposed.

Norway's stock market has gained 1.1% since February 28, while Saudi Arabia's benchmark has risen 2.5%. Iraq, Qatar and the United Arab Emirates could receive windfall revenues equivalent to substantial portions of their GDP. For Gulf producers, production disruptions complicate that potential benefit: higher prices help most when oil and gas can still reach buyers.

A Weaker Won Adds to the Fuel Bill

The South Korean won briefly passed 1,500 per US dollar in mid-March, reaching its weakest level since 2009. Foreign investors moved out of Korean assets and into holdings denominated in dollars that they considered safer.

Oil contracts priced in dollars make that currency move especially painful. When the won weakens, Korean buyers need more won to purchase the same amount of dollars. A rising dollar price for oil and a falling won therefore push the import bill higher at the same time.

South Korea faces a reinforcing cycle: expensive energy strains the economy, currency weakness adds to import costs, and those higher costs deepen inflation pressure. The stock sell-off and the currency decline are consequently connected to the same dependence on fuel from abroad.

Crude oil above $100 per barrel has also raised fears of stagflation, meaning weak or stagnant economic growth alongside rising prices. Economists estimate that the oil shock could add 0.7 percentage points to global inflation while reducing growth by 0.4 percentage points.

The Korea Development Institute projects that sustained high oil prices could reduce South Korea's GDP growth in 2026 by up to 0.45 percentage points. For an economy targeting approximately 2% growth and inflation in the 2% range, that would complicate efforts to meet both goals.

Japan's Consumers and Central Bank Face Pressure

Kiuchi Takahide, an executive economist at Nomura Research Institute, warned that continued price increases could weaken household spending enough to push Japan into recession.

If prices keep rising, the level of personal consumption cannot be sustained, and the Japanese economy could go into recession.

Household consumption matters because rising fuel costs leave people with less money for other purchases. The pressure on consumers adds to the cost squeeze facing companies that depend on energy to manufacture and transport goods.

The Bank of Japan faces a difficult interest rate decision after only recently leaving behind negative interest rate policies. Raising rates to combat imported inflation could weaken a fragile recovery. Maintaining supportive monetary policy could risk further currency depreciation and additional price increases.

Central banks in economies dependent on energy imports must therefore weigh two problems moving in opposite directions: higher prices and weaker growth. The crisis complicates efforts to maintain monetary easing when the cost of essential imports is rising.

Hormuz Closure Turns War into an Economic Crisis

Iran's new Supreme Leader, Mojtaba Khamenei, ordered the Strait of Hormuz to remain closed indefinitely. That order was the immediate trigger for renewed market panic, turning a regional military conflict into a crisis affecting energy supplies and economic activity around the world.

Shipping companies sought alternative routes around the Cape of Good Hope, adding weeks to delivery times and millions in extra costs. Maritime insurance premiums rose by an estimated $5 to $15 per barrel, adding a war premium to cargoes regardless of their origin.

US forces then launched airstrikes against Kharg Island, Iran's largest oil export hub. Iranian retaliation targeted Fujairah port in the United Arab Emirates, a facility designed specifically to bypass Hormuz. The attacks widened concern about the infrastructure used to export energy.

President Donald Trump proposed a naval coalition involving South Korea, Japan and China to escort tankers through the contested strait. Diplomatic complications could impede cooperation among the proposed participants.

Indirect contact between the CIA and Iranian intelligence operatives offering to discuss terms for resolving the conflict briefly relieved market pressure. Iran's ambassador to the United Nations publicly ruled out negotiations for the time being. As of March 17, no reopening date for Hormuz had been given.

The main dated developments trace how quickly the military conflict reached financial markets and government policy:

• February 28: The United States and Israel launched military strikes against Iran, beginning the period used to measure the market declines.
• Early March: Iran effectively blockaded Hormuz, and South Korea's Kospi suffered its record daily fall of more than 12%.
• March 6: South Korea launched its market stabilization program worth 100 trillion won.
• Mid-March: The won briefly weakened beyond 1,500 per US dollar.
• March 17: Emergency fuel measures, reserve releases and diplomatic proposals formed the response to the continuing crisis.

Investors Weigh a Correction Against Lasting Damage

Goldman Sachs analysts placed the Kospi's losses in the context of its extraordinary 176% rally since April 2025. They viewed the pullback as a consolidation phase, with the possibility of a recovery to new highs once geopolitical tensions moderated.

The earlier rally helps explain why some strategists regard the sharp fall as a market correction rather than a fundamental economic breakdown. A correction is a retreat from earlier prices; whether it remains temporary depends here in part on how long energy disruption lasts.

Eli Lee, chief investment strategist at Bank of Singapore, which is owned by OCBC, described the initial market response while making an oil shock a central condition of his assessment.

We expected a knee-jerk risk-off market reaction. But barring an oil shock, history shows that geopolitical events typically do not negatively impact equity prices on a prolonged basis.

South Korea's immediate budget pressures show why the duration of the energy shock matters beyond stock prices. Its planned supplementary spending of 10 trillion to 20 trillion won would support welfare and recovery while the government also manages financial market stress and fuel costs.

Kim In-wook, an associate professor at Sungkyunkwan University in Seoul, warned that investors' interpretation of emergency reserve releases could become a source of instability.

At some point, releasing strategic oil reserves may be interpreted by the market as a signal that the supply crisis can no longer be managed through normal channels. It is not the physical drawdown itself that would destabilise the market, but rather the market's collective judgment that the Strait of Hormuz is unlikely to reopen any time soon.

Emergency reserves provide oil during a disruption, while investor confidence depends on expectations about future supplies. For South Korea and Japan, the immediate challenge is to keep fuel available and limit economic damage while the route on which they rely remains closed.

The Bottom Line

• South Korea's Kospi suffered a record daily fall of more than 12% in early March; Japan's Nikkei has fallen nearly 9% since February 28.
• South Korea obtains approximately 70% of its crude oil from the Middle East, while Japan relies on Gulf producers for roughly 90% of its oil needs.
• Hormuz handles roughly 20 million barrels a day and 25% of seaborne petroleum trade; the disruption was also estimated at 20% of global seaborne oil trade.
• South Korea introduced fuel price caps, launched a stabilization program worth 100 trillion won and announced a release of 22.46 million barrels of oil.
• Japan authorized an oil release of 80 million barrels and is using existing subsidies to moderate fuel costs.
• China's CSI 300 has lost less than 1%, while Norway's and Saudi Arabia's stock markets have gained 1.1% and 2.5%, respectively.
• The won briefly passed 1,500 per US dollar, and economists estimate the oil shock could raise global inflation by 0.7 percentage points while reducing growth by 0.4 percentage points.
• As of March 17, no date had been given for reopening Hormuz.