How Oil Prices Impact the Japanese and South Korean Economies: Evidence from the Stock Market and Implications for Energy Security

Oil prices are volatile. How does this affect Japanese and South Korean firms? Since they import almost all of their oil, oil price increases may harm their economies. To investigate these issues, this paper examines how oil prices affect sectoral stock returns. Using Hamilton’s method to decompose oil price changes into portions driven by global demand and by oil supply, the results indicate that many sectors in both countries benefit from increases in global aggregate demand that raise oil prices. Many industrial firms in Japan that produce advanced products also benefit from supply-driven oil price changes. The finding that many firms benefit from higher oil prices indicates that blanket subsidies to compensate for oil price increases are unnecessary. Targeted subsidies would be more economical and eco-friendly. Many sectors in Japan and Korea that produce for the domestic economy are harmed by oil price increases. Large oil price swings will continue due to wars, tariffs, geopolitical events, and climate change. These will whipsaw sectors in both countries. To shield their economies from oil price changes, Japan and Korea should invest in technologies to improve wind, solar, and hydro power and should facilitate intra-regional trade in renewables. They should also encourage individual sectors such as airlines, cosmetics, agriculture, hotels, semiconductors, and automobiles to reduce their exposure to fossil fuels and to choose environmentally friendly production methods. In addition, both countries should expedite their targets for achieving carbon neutrality. This paper considers ways to achieve these goals.