"Middle East War Intensifies Inflationary Pressures...Asia Faces Dual Vulnerability of High Oil Prices and Weak Currencies"[2026 Financial Forum]

Sayuri Shirai, Professor of Economics at Keio University

Special Lecture at the '2026 Asia Financial Forum'


"Energy and Currency Depreciation Shocks... Serious Policy Trade-Offs for Korean and Japanese Central Banks"

"AI-Driven Su

As global inflationary pressures continue to intensify amid the Middle East conflict, a new analysis has found that Asian countries such as Korea and Japan are facing a "dual risk" of rising energy prices and depreciating currency values. It has been pointed out that these supply-side shocks are severely constraining the fiscal and monetary policies of Asian economies, deepening the policy mix dilemma.

Sayuri Shirai, Professor of Economics at Keio University in Japan and former member of the Bank of Japan's Policy Board, delivered a special lecture on "Structural Changes in the Global Economy and the Evolving Role of Asian Financial Markets" at the 2026 Asia Financial Forum hosted by The Asia Business Daily, held at the Westin Josun Seoul in Jung-gu, Seoul, on May 21.

Professor Shirai stated, "The recent geopolitical developments in the Middle East again highlight how crucial energy security is for both the global economy and Asia."

Oil Price Surge and Currency Depreciation: 'Double Shock'... Heightened Monetary Policy Dilemma

Sayuri Shirai, Professor of Economics at Keio University's Faculty of Policy Management, is delivering a special lecture on the topic of "Structural Changes in the Global Economy and the Evolving Role of Asian Financial Markets" at the '2026 Asia Financial Forum' hosted by The Asia Business Daily, held at the Chosun Hotel in Jung-gu, Seoul on May 21, 2026. Photo by Jinhyung Kang

Professor Shirai diagnosed the energy risk originating from the Middle East as a structural issue that extends beyond simple oil price fluctuations, directly leading to inflation, exchange rate volatility, and greater macroeconomic uncertainty. She especially predicted that the current upward trend in oil prices could be prolonged. She explained, "With the weakening influence of OPEC, it has become unclear to what extent member countries will adhere to existing quota systems," and added, "Even if a ceasefire is reached in the future, physical supply constraints could persist for a considerable period."

Such cracks in the energy supply chain are casting a dark cloud over the economies of Korea and Japan, which are highly dependent on Middle Eastern energy. Professor Shirai noted, "The collapse of the collateral regime that previously supported oil prices is causing even greater price volatility," and forecast, "We are witnessing inflation reemerging in the United States, Japan, and Korea. Even if inflation rates slow in the near future, absolute price levels are likely to remain at their peak."

Additionally, the increased preference for the dollar as a safe asset due to Middle East risks has led to a sharp depreciation in the currencies of major Asian countries, further driving up import costs. Professor Shirai pointed out, "The Japanese yen has seen the largest depreciation among Asian currencies, followed by the Korean won and Indian rupee," and emphasized, "Asia is exposed to a 'double vulnerability' of both external energy price risks and currency depreciation."

The problem is that available policy response options are limited. Normally, inflation is countered by raising policy rates or implementing fiscal tightening, but such measures are ineffective in the face of a supply shock, according to her assessment. Professor Shirai explained, "Rising inflation leads to higher long-term government bond yields (interest rates), which threatens the sustainability of national debt, making it difficult for governments to implement large-scale fiscal expansion policies."

She further pointed out that central banks' monetary policies are also trapped in a dilemma. Professor Shirai said, "It is extremely difficult for central banks to provide the right policy solution because the current inflation is rooted in supply-side shocks." She expressed concern that "if central banks raise interest rates to curb exchange rate depreciation and inflation, it could ironically end up suppressing the real domestic economy." She added, "The trade-off between raising rates to fight inflation and avoiding downward pressure on economic growth is becoming increasingly severe."

Regarding the response to currency depreciation in Asian countries, Professor Shirai stated, "While raising policy rates can slow the pace of depreciation, it also suppresses domestic demand and, at the same time, increases government bond yields, thereby raising debt servicing costs." She continued, "Not only is the tension between external objectives and domestic policy intensifying, but the complexity of the fiscal and monetary policy mix is also growing."

AI-Driven Energy Demand Surge: Korea-Japan Cooperation Needed for 'ASEAN Grid'

Sayuri Shirai, Professor of Economics at Keio University’s Faculty of Policy Management, attended the '2026 Asia Finance Forum' hosted by The Asia Business Daily on May 21 at the Chosun Hotel in Jung-gu, Seoul. She gave a special lecture on the topic of "Structural Changes in the Global Economy and the Evolving Role of the Asian Financial Market." 2026.5.21 Photo by Kang Jinhyung

Professor Shirai also emphasized that the explosive growth of the artificial intelligence (AI) industry has emerged as a new "structural constraint" on economic growth. She stated, "AI is currently generating enormous demand for electricity and energy, which is leading to energy shortages, increased price volatility, and greater carbon regulation risk." She stressed, "Ultimately, how stably a country can secure energy is becoming the core of national economic competitiveness."

As a solution, she proposed that Korea and Japan actively cooperate in the 'ASEAN Grid Project,' a cross-border power grid initiative being pursued by ASEAN member states. Professor Shirai explained, "ASEAN countries and India are experiencing a rapid increase in energy demand due to accelerated digitalization, but supply remains severely insufficient. Vietnam is strong in solar power, while other parts of ASEAN have advantages in hydropower, and efforts are underway to connect these power grids." She suggested, "If Korea and Japan provide technological and financial support here, it could create a win-win structure that addresses energy constraints in the Asian region together."

Diversifying Cross-Border Payment Networks... Gradual Fragmentation of Dollar Hegemony

Finally, Professor Shirai predicted that advances in cross-border payment systems could act as a catalyst for reducing dependence on the US dollar in the long term. She observed, "Currently, QR code-based cross-border payment linkages are actively being implemented in ASEAN, India, and the United Arab Emirates (UAE), among others. In the future, major economies will increasingly seek to settle directly in local currencies with resource-exporting countries like the UAE and India."

She further explained, "At present, trading between the yen and the won requires passing through the US dollar as an intermediary. However, as payment networks across Asia become more interconnected, direct bilateral transactions will ultimately increase." She analyzed, "Innovation in payment infrastructure is reshaping how currencies are used."

Professor Shirai concluded, "While the existing global system based on the US dollar and SWIFT will not collapse overnight, it is highly likely that, in the future, several alternative payment systems will develop in parallel, leading to the partial fragmentation of dollar hegemony."

This content was produced with the assistance of AI translation services.