Iran War and Soaring Oil Prices Batter Yen... Possibility of 160 Yen per Dollar Rises Despite Tightening Policy

BOJ Maintains Rate Hike Path
"Yen Moves Driven by Dollar"

The value of the Japanese yen is fluctuating in response to the Iran war and trends in international oil prices. As the possibility of a prolonged conflict rises, the increased demand for the US dollar is fueling a weaker yen against the dollar. Concerns are also growing about an expanding trade deficit due to rising oil prices, and despite the Bank of Japan (BOJ) maintaining its interest rates, there is renewed speculation that the yen could re-enter the 160-yen range per dollar.

An employee is organizing Japanese yen and US dollars at the Counterfeit Currency Response Center of Hana Bank in Jung-gu, Seoul. Photo by Yonhap News Agency

Nihon Keizai Shimbun (Nikkei) reported on March 23 that, despite the BOJ's hawkish stance on March 19, the possibility of the yen returning to the 160-yen range per dollar is being raised. As of 8:40 a.m. on that day, the yen-dollar exchange rate stood at 159.23 yen per dollar.

Kazuo Ueda, Governor of the BOJ, reaffirmed his commitment to maintaining the current rate hike trajectory, stating, "The risk scenario has increased due to higher crude oil prices stemming from escalating tensions in the Middle East." He added, "Since the current real interest rate remains at a very low level, if the economic and price outlook for the 2% inflation target materializes, we will continue to raise the policy rate and adjust the degree of monetary easing in response to improvements in economic and price conditions."

Nikkei analyzed that, even though the market is expecting an interest rate hike by Japan in April, the strengthening of the yen lasted only one day because the main drivers of the exchange rate are not the BOJ's policy, but rather Middle East risk and rising oil prices.

A representative from Barclays Securities commented, "The market is strongly conscious of the psychological threshold of '160 yen to the dollar,'" and added, "There are numerous factors contributing to the weaker yen."

Recently, the yen exchange rate has been moving more in response to the US dollar than to the yen itself. This is because concerns about a prolonged Iran war have intensified demand for the dollar as a safe-haven asset. In fact, as reports emerged that the US Department of Defense was preparing for possible ground troop deployments, the dollar index—which reflects the strength of the dollar against major currencies—rose again to the upper end of the 99 range.

Fears of inflation due to rising oil prices and the fading expectation that the US Federal Reserve (Fed) will cut rates are also accelerating the weaker yen. According to CME FedWatch, as of March 20, the probability of a rate freeze by the end of the year has exceeded 80%. Unlike earlier in the year, when two to three rate cuts had been expected, there is now increasing sentiment that the interest rate gap between the US and Japan will not narrow, further increasing selling pressure on the yen.

This is especially significant for Japan, which has a high dependence on energy imports. As instability in the Middle East drives up international oil prices, Japanese companies are selling yen to pay for imports. A representative from Sumitomo Mitsui Banking Corporation stated, "When oil prices rise, there is a structural tendency to sell yen and buy dollars."

The trend of speculative selling of the yen is also steadily increasing. According to the US Commodity Futures Trading Commission (CFTC), as of March 17, speculative short positions on the yen jumped by more than 60% compared to the previous week.

As the value of the yen continues to fall, concerns are mounting again about possible intervention in the foreign exchange market by the Japanese government and the BOJ. Market experts are closely watching for signs of intervention by the authorities, but still believe that the yen could gradually reach 160 yen or even approach the previous high of 162 yen per dollar.

This content was produced with the assistance of AI translation services.