The early stages of the US-Iran conflict is seeing the US dollar and the Swiss franc among the more favoured currencies so far today. The Japanese yen typically has safen haven traits but has lost a lot of that allure in recent months. And now with oil prices swinging higher, that's compounding woes as energy insecurity outweighs safe haven demand for the time being.
The easy take is that higher oil prices just means a worsening and widening trade deficit for Japan. But drilling deeper, there's also the case of cost push inflation seeping in as Japan heavily relies on energy imports. And cost push inflation is not the kind of inflation dynamic that the BOJ wants to see. In fact, it's the total opposite.
In terms of economic impact, Morgan Stanley MUFG estimates that a 10% spike in oil prices will shave around 0.1% off Japan's real GDP. That also poses short-term stagflation risks to the economy.
As such, all of the negatives seem to be outweighing the usual narrative of safe haven demand in the yen currency - one that has been weakening since the Takaichi trade took over anyway in October last year.
This is now pushing USD/JPY up to the 157.00 level, hitting a three-week high. In the weeks prior, traders have been cautious not to overstep in fear of incurring the wrath of Tokyo officials. Now, it seems like we're beginning to run up to test that boundary once more.
It once again reaffirms that the path of least resistance for the yen at the moment is for a move lower. However, actual intervention by the Japan ministry of finance has the potential to at least shift things in the other direction.
That being said, it might just only be for a temporary case - similar to what we saw in July 2024. By January 2025, USD/JPY nearly recovered all of the drop from the intervention (at 160.00) in moving back up to 159.00.
