MUFG’s Senior Currency Analyst Lee Hardman notes the Japanese Yen has underperformed since the Middle East conflict, with USD/JPY back near year-to-date highs. He argues higher energy prices are a negative terms-of-trade shock for Japan, making authorities more tolerant of Yen weakness and raising the bar for FX intervention, while markets increasingly expect a Bank of Japan rate hike in April.

Weaker Yen tolerated as energy costs rise

"The yen has been one of the worst performing G10 currencies since the Middle East conflict started alongside the European currencies of the euro and Swedish krona."

"Yen weakness is more fundamentally driven given the negative terms of trade shock for Japan from higher energy prices. As a result, Japan may be more tolerant of allowing a weaker yen in the near-term even though it will reinforce upside inflation risks alongside higher energy prices. It potentially creates a higher bar for intervention that could require more concern over the pace of yen weakness and evidence of speculative selling."

"Yen weakness if one reason why BoJ watchers still expect the BoJ to hike rates again as soon at the April policy meeting. The latest Bloomberg survey of Japan economists revealed that 37% now expect the BoJ to hike again in April up from 17% from the previous survey two months ago."

"Yen weakness would likely extend further if the BoJ refrains from hiking rates in April especially at a time when a hawkish repricing is underway in other government bond markets outside of Japan."

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