The Japanese yen exchange rate is being affected by escalating geopolitical tensions

Since the US-Israeli coalition’s attack on Iran on February 28th, the yen exchange rate has continuously declined, falling from a range of 155 yen to the dollar to as low as 159 yen, reaching its lowest level in nearly 18 months. The yen is currently only a step away from the key psychological level of 160, with bearish sentiment rampant in the foreign exchange market, and the pressure on the yen to depreciate has reached a critical point. Given that the yen exchange rate continues to hover below the 160 “red line,” market focus has completely shifted to the intervention of the Japanese authorities.

Following the surge in oil prices and inflation expectations caused by the US-Iran war, many developed economies around the world are seeing expectations of interest rate hikes. On March 19th, the Bank of Japan kept its benchmark interest rate unchanged at 0.75%. Bank of Japan Governor Kazuo Ueda adopted a cautiously hawkish tone at the post-meeting press conference, leaving open the possibility of an April rate hike, thus supporting the yen. Following Ueda’s remarks, the yen briefly rose to 157.5 yen to the dollar. However, this exchange rate level only lasted one day before falling back to 159 yen to the dollar. Analysts pointed out that although Kazuo Ueda maintained the possibility of an April rate hike, he did not release a clear signal of a rate hike at his March press conference, emphasizing the need to observe the results of the spring labor negotiations and the persistence of inflation, leading to a cooling of market expectations for policy normalization. This left the yen lacking internal support and will continue to be dominated by external factors in the short term.

Furthermore, the most direct reason for the yen’s sharp decline was the escalation of the conflict between the US, Israel, and Iran, and the blockade of the Strait of Hormuz, leading to tight oil supplies and rising oil prices. As an island nation, Japan relies heavily on maritime transport for most of its raw material imports and goods exports. Rising fuel prices mean increased transportation costs, exacerbating inflation risks, putting pressure on corporate profits, increasing household spending, and further suppressing domestic demand. At the same time, due to weakened expectations of a Fed rate cut, investors generally worried about rising inflation risks and began selling yen. Meanwhile, global capital flowing to dollar assets for safety also indirectly accelerated the yen’s sell-off.

The fragility of Japan’s trade structure, coupled with large-scale purchases of dollars by institutional investors, exacerbated the yen’s weakness. The market generally believes that Japan’s reliance on imported energy and a deteriorating trade balance will lead to a sell-off of the yen. Hiroshi Suzuki, chief currency strategist at Sumitomo Mitsui Banking Corporation, stated, “If oil prices rise, the yen will inevitably be sold off, while the dollar will be bought.” As the yen’s weakening trend against the dollar intensifies, market vigilance regarding potential Japanese government intervention in the foreign exchange market may increase. Where will the yen’s exchange rate fall on its downward trajectory? The market is closely watching for possible policy adjustment signals from the Bank of Japan.

On Monday (March 23), Jun Mimura, Japan’s top foreign exchange official, stated that the Japanese government is prepared to take all necessary measures to address volatility in the foreign exchange market, noting that speculative trading in the crude oil futures market may be influencing exchange rate movements. He emphasized that considering the impact of exchange rate fluctuations on people’s lives and the overall economy, the Japanese government is “prepared to respond at any time in all aspects.” Following Mimura’s remarks, the yen briefly rose to 159.02 yen per dollar, but subsequently retreated.

In addition to strengthening verbal intervention in the exchange rate, the Japanese government has also begun preparing fiscal measures to buffer the impact of rising energy prices on the domestic economy.

The latest statistics released by Japan’s Agency for Natural Resources and Energy show that on March 16, the national average retail price of regular gasoline in Japan rose to 190.8 yen per liter, an increase of 29 yen from the previous week. To alleviate the rise in oil prices, the Japanese government resumed providing price subsidies to oil wholesalers on March 19 in order to control the average retail price of gasoline at around 170 yen per liter. According to Japanese media reports, the government plans to use approximately 800 billion yen of budget reserves to stabilize gasoline prices. Clearly, the Japanese authorities are attempting to address both market volatility and rising living costs through a two-pronged approach of fiscal support and policy guidance. However, whether this measure can avert the crisis remains to be seen.