Persistent conflict in the Middle East continues to drive oil prices higher, intensifying concerns about inflation. Against this backdrop, investors are reducing their risk exposure ahead of the weekend. As a result, the yen has weakened significantly, falling to its lowest level since 2024. Specifically, the yen depreciated by 0.2% against the US dollar, reaching a low of 159.69. This follows a week of extreme volatility for Brent crude oil, which is now hovering around $100 per barrel.
Concurrently, the Japanese government bond market has shown weakness, with the yield on the 10-year bond rising by 5.5 basis points to 2.235%. The ongoing climb in crude oil prices is exerting increasing inflationary pressure on Japan, which is highly dependent on Middle Eastern oil.
Meanwhile, traders report that hedge funds have been purchasing short-term US dollar call options against a basket of currencies as a hedge. This strategy aims to mitigate the risk of a potential gap higher in the dollar on Monday, driven by news related to the Iran conflict over the weekend.
Takafumi Onodera, head of sales and trading at Mitsubishi UFJ Trust Bank's New York branch, commented, "If the Iran conflict keeps oil prices and yields elevated, the USD/JPY rate could gradually approach 160. Actual intervention by Japanese authorities may prove quite difficult, suggesting the pair could move even higher."
The yen's sustained depreciation is bringing its exchange rate closer to levels that previously prompted Japanese authorities to intervene to support the currency. However, strategists note that the current Iran conflict situation, combined with a series of resilient US economic data releases, has fundamentally strengthened the dollar. This creates a high threshold for Japanese intervention in the currency market.
According to Bloomberg strategist Mark Cranfield, for Japanese authorities, the current environment of rising US short-term bond yields presents a highly unfavorable scenario for attempting to curb yen weakness. With the two-year US Treasury yield breaking above a key resistance level, and the Bank of Japan expected to hold policy steady at its upcoming meeting, strong momentum for further dollar gains is building.
On Friday, Japan's Finance Minister, Satsuki Katayama, told reporters that Japanese financial authorities are maintaining closer-than-usual contact with their US counterparts. She avoided commenting directly on potential currency intervention. Japanese officials have clearly stated that they are more concerned with the volatility and speed of currency moves than with specific exchange rate levels.
David Forrester, a senior strategist at Credit Agricole CIB in Singapore, noted, "Officials have threatened joint currency intervention with the US multiple times but have not followed through. The number of times they can do this is limited." This, he explained, is why the yen's reaction has been relatively muted. "The official verbal intervention signals this time were not particularly strong, as they avoided using the typical phrases that warn of imminent intervention."
Last month, the yen found some support following Sanae Takaichi's overwhelming victory in the Lower House election. However, the currency subsequently faced renewed downward pressure after reports indicated her reluctance to pursue further interest rate hikes and her nomination of two dovish members to the Bank of Japan's board.