The struggle continues for the yen currency, even if market players are feeling more optimistic about the US-Iran situation. With each passing day the war continues, the damage to the Japanese economy continues to stack up. That especially as the Strait of Hormuz remains in de facto closure.

It’s hard to remember the last time the yen was this beaten up in a time of a geopolitical crisis. But alas, it is what it is now as all the fundamental factors are pretty much working against the currency.

Since Japan’s ministry of finance took a step back after the first week of May, USD/JPY has been on a slow grind higher and has recovered over 400 pips from the lows earlier this month.

That’s a damning message to Tokyo officials, who must know that their limits are being tested here.

However, their hands are a bit tied for a couple of reasons. One, the fact is that the war is still raging on and there is no actual change to the oil market situation. Sure, futures prices have dropped off but physical prices remain high and supply issues continue to persist.

Two, they also need to be mindful amid this IMF guideline here.

And USD/JPY traders are certainly aware of that in slowly pushing the limits of where they can take USD/JPY again now.

All that being said, traders surely also know very well that if they take price above the 160.00 mark then it dramatically raises the stakes of the game. It is unlikely that Tokyo officials will want to allow USD/JPY to breach that psychological level so easily, especially after drawing a firm line at that level in late April.

However, the ministry of finance also will find it tough to sustain any intervention push in the big picture. With already negative fundamentals for the yen currency, all of that is being compounded by the fact that the government has to issue another fresh round of funding to compile an extra budget.

As mentioned before this:

“A fresh round of debt will be another blow to investor confidence towards the Takaichi government, in a time when fiscal worries are already being driven up amid rising yields.

It also adds to more complications for the BOJ, not least with them needing to reconsider their tapering plans now.

The central bank is under pressure to raise interest rates amid surging price pressures, but don’t want to seem desperate in deciding on that just to defend a falling yen currency. But at the same time, fiscal concerns and worsening economic conditions are two major pain points that the BOJ has to try and help balance out as well. So, they are put in a very tough spot.”

The only comfort is that the rout in the Japanese bond market has stopped for a bit over the last few days. But unless the big picture situation changes, things will continue to look rather bleak for the yen in the short-to-medium term.