The Yen Depreciates Approaching 160 Mark, Energy Shocks Reshape Foreign Exchange Trading Logic

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Special Correspondent Chen Jialing, The 21st Century Business Herald, Fukuoka, Japan

The 160 mark has once again entered the market’s view.

Since the U.S. and Israel launched military strikes on Iran, the yen has weakened against the dollar since March, briefly touching 159.76 yen per dollar, the weakest level since Japan’s government intervention in the currency market in July 2024, and has continued to hover below the 160 “threshold”—widely regarded by the market as a warning line for Japanese government intervention. As of 5 p.m. Tokyo time on March 18, the yen was at 158.79 yen per dollar. After entering the European trading session, the yen depreciated, and the exchange rate briefly returned to the 159 level.

This situation also reminds the market of the currency market turbulence in 2024. That year, after the yen fell below 160, Japan’s Ministry of Finance intervened with 5.5 trillion yen. However, compared to the summer of 2024, sources say that this round of yen depreciation is more driven by fundamental factors such as rising energy prices, increased demand for safe-haven dollars, and Japan’s fragile trade structure.

Currently, the yen is under pressure again, and Tokyo’s options for response seem more limited than before, with policy intervention space significantly narrowed. Market attention has shifted to the Bank of Japan—although most expect the BOJ to keep monetary policy unchanged at this week’s policy meeting, the increasingly complex macro environment, relatively loose monetary policy, and persistent yen weakness raise the question: will the window for future rate hikes be forced open earlier?

Amid ongoing turmoil in the Middle East boosting safe-haven demand for the dollar, USD/JPY briefly approached the 160 mark.

On March 18, in Tokyo markets, the yen temporarily rebounded to the 158 yen range. Market reports indicate that the Strait of Hormuz, previously effectively blocked, has begun to see oil tankers resume passage, easing the rise in oil prices temporarily. Some investors covered short positions on the yen, prompting a short-term rebound. However, most market participants believe this rebound is mainly a short-term technical correction.

“This round of yen depreciation is mainly driven by the impact of rising energy prices on fundamentals,” said Wang Xinjie, Chief Investment Strategist at Standard Chartered China Wealth Solutions, in an interview with the 21st Century Business Herald on March 17. He explained that after Shinzo Abe’s election, Japanese stocks rose sharply due to aggressive fiscal stimulus policies, outperforming global markets year-to-date. Against the backdrop of escalating Iran tensions, soaring energy prices have increased inflation expectations in Japan, causing the Japanese stock market to underperform global indices since February 21. Additionally, Japan’s fiscal plans lack funding sources, leading to rising Japanese government bond yields. The yen has also depreciated amid capital inflows into USD safe-haven assets, reflecting not just speculative bearishness but also structural fundamental weakness.

Yoshida Takeshi, a researcher at the Macro Economic Center of the Japan Research Institute, told the 21st Century Business Herald that recent yen depreciation is driven by two main factors: geopolitical risk-induced “crisis-driven dollar buying (safe-haven demand),” and Japan’s “fragile trade structure.”

“Tensions in the Middle East have led to a general strengthening of the dollar against major currencies, but for Japan, which relies heavily on Middle Eastern oil imports, this has pushed the yen weaker. Meanwhile, rising import prices have deepened concerns over trade balance deterioration, amplifying yen selling pressure from a supply and demand perspective,” Yoshida said.

In contrast, the dollar has recently strengthened significantly. Lee Ferridge, Strategist at State Street, previously stated, “Institutional investors’ dollar buying has been the strongest in the past two years.”

Among G10 currencies, the yen and euro are the weakest performers, as they are generally more sensitive to commodity price changes.

However, some resource-linked currencies show different trends. According to the latest data from the Commodity Futures Trading Commission (CFTC), net long positions in currencies of resource-exporting countries like the Australian dollar and Canadian dollar have actually increased compared to late February before Iran’s attack.

For example, as of February 24, speculative holdings of 52,000 contracts in AUD/USD net long; by March 10, this increased to 54,000 contracts. Similarly, net long positions in CAD/USD grew from 27,000 to 36,000 contracts.

Yoshida Hitoshi, Chief Forex Advisor at Monex Securities, pointed out in a report that this indicates that from the dollar’s perspective, the USD is being sold against resource currencies like the AUD and CAD. “This suggests that the current market theme is less about ‘Middle East conflict’ and more about the energy supply uncertainties triggered by the Strait of Hormuz risk,” Yoshida said.

As USD/JPY briefly approached the 160 level, market expectations of imminent intervention grew.

On March 17, in Tokyo’s forex market, the yen strengthened slightly. The day before, Japanese Finance Minister Shunichi Suzuki said, “We will respond with the utmost vigilance and are prepared to take decisive measures.” This statement was seen as a restraint on yen depreciation and prompted yen buying on the 17th. However, the market remains highly sensitive to Middle East developments.

Most market analysts believe that current exchange rate fluctuations have not yet reached the level that would trigger intervention. Historical experience shows that Japanese authorities typically do not intervene at specific exchange rate levels but focus more on deviations from long-term trends.

In 2022 and 2024, the Japanese government intervened multiple times to curb yen depreciation. The 2022 intervention occurred near 145 yen per dollar, while the 2024 intervention was around 160 yen.

“Even at the same 160 level, the current market environment is quite different from 2024,” said a forex trader.

Yoshida Hitoshi pointed out that past interventions usually occurred when USD/JPY deviated 20-30% from the five-year moving average and more than 5% from the 120-day moving average. Currently, even if the rate approaches 160, the deviation from the five-year average is only about 15%. To reach a 5% deviation from the 120-day average, USD/JPY would need to approach 162. Based on this logic, the pair might need to approach 170 or higher to more easily trigger Japanese authorities’ re-entry into the market.

Meanwhile, the current market structure is also markedly different from 2024. In July 2024, USD/JPY briefly surged to 161, a 38-year high since 1986. At that time, CFTC data showed speculative net short positions in yen approaching 180,000 contracts, near record highs. As of March 10, speculative net short positions were only about 40,000 contracts.

“From the futures market’s short positions, the current yen depreciation is far less speculative,” Wang Xinjie said.

Additionally, USD holdings are also very different from 2024. In April 2024, when USD/JPY first broke 160, net long USD positions reached about 380,000 contracts, near record highs. This year, in February, USD was net short by about 210,000 contracts, and as of March 10, net short positions remained around 60,000.

Yoshida Hitoshi believes that if speculative funds further expand their “sell yen, buy dollar” positions, even if the Japanese authorities intervene, it could be quite difficult to change the exchange rate trend.

Yoshida also pointed out that unlike the intervention in summer 2024, which mainly aimed to suppress speculative positions and force liquidation, current yen selling pressure is more driven by real demand factors such as trade balances. “In this supply-demand driven yen depreciation scenario, relying solely on forex intervention may not produce sustainable effects,” he said.

Market analysts believe that the current yen depreciation mainly reflects macroeconomic fundamentals, which weaken the justification for intervention. From the perspectives of policy effectiveness, international cooperation, and market structure, Japan’s current “effective space” and “trigger threshold” for intervention are significantly more limited than during the 2022 and 2024 rounds.

“If Japan intervenes now, it could trigger speculative short positions, greatly reducing the effectiveness of intervention,” Wang Xinjie said. He believes that the future effective way to reverse the yen’s depreciation trend is to focus on enhancing Japan’s economic resilience.

Amid energy crises and narrowing intervention space, market attention is turning to the Bank of Japan.

On March 17, the Reserve Bank of Australia raised its policy rate. This week, major central banks including the Federal Reserve, European Central Bank, and Bank of Japan will hold monetary policy meetings. Market consensus expects these central banks to maintain relatively hawkish stances amid inflation pressures from rising energy prices.

Yoshida Hitoshi noted that if the Bank of Japan shows caution about further rate hikes at this meeting, the yen could continue to weaken relative to other currencies.

Particularly, attention should be paid to the European Central Bank’s stance. Yoshida also warned that since the end of last month, the euro has fallen even more against the dollar than the yen; if the ECB adopts a more hawkish stance to curb inflation, the relative strength of the euro versus the yen could reverse, leading to a more pronounced yen depreciation against the euro and other cross currencies (like EUR/JPY).

“The monetary policy meetings could actually increase the risk of USD/JPY breaking through 160,” said a market participant. After the BOJ, Fed, and ECB meetings, the relative strength among the three currencies might form a pattern of “dollar strong, euro second, yen weakest.”

Regarding the BOJ’s rate hike prospects this year, Wang Xinjie believes that the market still generally expects the BOJ to raise rates twice within the year.

Mitsui Sumitomo Asset Management’s Chief Market Strategist, Masahiro Ichikawa, said that the duration of the ongoing U.S.-Israel-Iran conflict and when oil prices will stabilize remain unpredictable. Therefore, the BOJ needs to observe more data before making policy decisions.

“Key indicators include the results of the March spring labor-management negotiations, the BOJ’s April Tankan survey, and regional economic conditions,” Ichikawa said. “From these, we can assess whether wages are rising significantly and how oil price increases are affecting corporate profitability and regional economies. These factors will be important for the BOJ’s future policy decisions.”

JPMorgan’s research report states that the BOJ faces a dual dilemma of uncertainty and yen weakness, making it difficult to ease its normalization path. The report emphasizes that Japan’s policy situation differs markedly from the Fed and ECB. The latter two have near-neutral policy rates and can wait more comfortably; Japan’s monetary policy remains highly accommodative. With global inflation concerns possibly reigniting, delaying further would make the BOJ more conspicuous and continue to pressure the yen downward. “The BOJ has less time to wait than its peers,” it concludes.