USD/JPY is up 45 pips to a session high at 159.39.
The energy crisis is potentially disasterous for the Japanese economy as it imports virutally all of its energy needs. Remember that it’s not just oil that’s being blockaded in the Strait of Hormuz but natural gas as well, which of it heading to Asia. That’s seen import prices surge at a precarious time for inflation in Japan.
In terms of the chart, the last time we were here, the Japanese Ministry of Finance did a rate check in US hours (on a Friday) that sent the pair sharply lower. After a modest recovery, there was a second wave lower when Takaichi won a super-majority in the Lower House. The war has reversed those gains and with brent crude above $100, Japan is hurting.
They will participate in the international reserve release and the country has 250 days of reserves so there is no risk of shortages but they are unlikely to be refilling it with the $60 oil we saw last month.
Zooming out, USD/JPY is truly in the red zone. The high in 2024 was 161.95 so that’s the next destination if USD/JPY can break higher. Beyond that, we’re back to 1986 levels.
USD/JPY weekly
Critically, Japan isn’t making too much noise about the rise in the pair, in part because of the changing fundamentals around energy. I wouldn’t count on them keeping quiet though. The fall in the currency compounds the rise in domestic energy prices and adds to some of the inflation headwinds in the country. Moreover, it’s pushing up global sovereign yields in a move that could rattle Japan. So far, JGB yields haven’t perked up in the same way that we’ve seen elsewhere but that can’t be far off it oil continues to rise.
