KUALA LUMPUR - Stock markets in South Korea and Japan have recorded the biggest losses globally as rising oil prices linked to the Middle East conflict hurt fuel-dependent economies.

In Seoul, the Kospi Index has dropped 12% since the conflict began on February 28, while Tokyo’s Nikkei 225 has fallen nearly 9%.

South Korea has moved to limit fuel price increases to control inflation, while higher oil prices in Japan are making it harder for the Bank of Japan to manage inflation without slowing growth.

The declines in both countries are steeper than in Europe, where markets in the UK, Germany and France have fallen about 7% due to reliance on Gulf energy supplies.

Elsewhere, Hang Seng Index in Hong Kong dropped more than 4%, while China’s CSI 300 Index recorded a smaller fall of less than 1% due to its focus on renewable energy, and the S&P 500 slipped 3.6 per cent.

“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,” said Ray Sharma-Ong, deputy global head at Aberdeen Investments.

Global markets have been shaken by rising oil prices over the past two weeks after Iran blocked the Strait of Hormuz, disrupting supply flows.

Higher crude prices have raised concerns about stagflation, making it harder for central banks to ease policies while supporting economic growth.

With oil trading above USD100 per barrel, economists estimate it could increase global inflation by 0.7 percentage points and reduce growth by 0.4 percentage points.

According to Morgan Stanley, Asia is the most dependent region on imported energy, with oil and gas deficits making up 2.1% of its economy compared to 1.5% in Europe.

South Korea is the most exposed major economy with an energy trade deficit equal to 4.3% of its economy, followed by Japan at 2.7% and China at 1.8%.

Analysts at ING said South Korea’s fuel price cap may distort supply and demand and create bigger problems later.

Other countries in Asia have also taken steps to manage the crisis, with Thailand introducing work from home measures and the Philippines adopting a four-day work week for government staff.

Before the conflict, South Korea and Japan had been among Asia’s best-performing markets due to strong demand for chips and government stimulus measures.

The Kospi had risen 48% and the Nikkei 225 gained 17% in the first two months of the year before the sharp drop.

On March 4, the Kospi fell 12%in its biggest-ever decline, forcing a temporary trading halt to calm the market.

“Japan and Korea are giant industrial engines that run on imported oil,” said Stephen Innes of SPI Asset Management.

“When crude spikes it moves straight through the corporate bloodstream. Input costs surge, inflation expectations climb and earnings estimates get marked down faster than analysts can rewrite their notes. 

It is the macro equivalent of watching a tax get imposed on the entire economy overnight,” Ong added.

With the conflict entering its third week and no ceasefire in sight, Donald Trump said US forces had struck targets in Iran and warned of further action if shipping routes are disrupted.

Analysts at BNP Paribas said market volatility is likely to continue as the situation remains uncertain.

“We caveat our view with the acceptance that events continue to move fast and in a somewhat unpredictable manner. 

“It is this VUCA [volatility, uncertainty, complexity and ambiguity] which, in our view, is driving market sentiment,” said William Bratton of the bank.