MUFG’s Senior Currency Analyst Lee Hardman highlights that the Japanese Yen has held up relatively well despite the energy price shock, supported by expectations that the BoJ remains on track to raise rates, potentially as soon as April. However, a prolonged Middle East conflict and higher Oil prices could make the BoJ more cautious, encouraging a weaker Yen alongside Japan’s negative terms-of-trade shock.

BoJ hike plans versus energy shock

"The yen has held up relatively well so far in response to the energy price shock triggered by the conflict in the Middle East."

"The yen has been supported overnight by a Bloomberg report stating that BoJ officials are still on track to raise interest rates, with the possibility of an April hike not ruled out according to people familiar with the matter."

"The report adds that BoJ officials have not altered their stance of proceeding with rate increases if the economic outlook evolves as expected."

"If crude prices remain elevated amid prolonged tensions in the Middle East, that could push up inflation expectations and reinforce price momentum."

"We have been assuming that a more prolonged conflict would make the BoJ become cautious over hiking rates further in the near-term encouraging a weaker yen alongside the negative impact on the yen from the terms of trade shock for Japan’s economy from higher energy prices."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)