MUFG’s Derek Halpenny links yen weakness to rising crude oil prices, higher global yields, and Middle East tensions, which are countering Japan’s recent Ministry of Finance (MoF) action in the FX market. He says the Bank of Japan (BoJ) holding rates has contributed to Japanese Government Bonds underperforming and real yields staying low.
He notes crude oil has moved higher again, adding to inflation worries and unsettling sovereign bond markets after US inflation came in above expectations. He also cites the Strait of Hormuz being closed as crude prices drift higher.
Global yields are described as rising again, which adds pressure to the yen against the US dollar. He states USD/JPY has moved above 158, the level linked to the last MoF intervention on 6 May.
He adds that the pair is moving back towards the highs seen on 30 April, when intervention first occurred, with both interventions still to be confirmed. He also says real yields are falling as inflation rises, which may prompt further MoF and BoJ FX intervention to limit another sharp rise in USD/JPY.
It appears the fundamental pressures on the yen are building again, much like we saw last year. Rising global bond yields and higher oil prices are creating a difficult environment for Japan. With Brent crude recently breaking above $95 a barrel, the costs for Japan as a major energy importer are increasing, which naturally weighs on its currency.
The key driver remains the interest rate difference between Japan and other major economies, especially the United States. With US 10-year yields holding firm above 4.8% while Japanese yields remain near 1%, the incentive to sell the yen is powerful. This is the same dynamic that prompted the Ministry of Finance interventions we saw back in April and May of 2025.
For traders, this signals a period of high volatility, with the underlying trend for USD/JPY pointing higher. The threat of further official intervention means any upward move could be met with a sudden, sharp reversal. This makes buying call options on USD/JPY a potentially useful strategy to gain from upward moves while capping downside risk.
We are seeing the pair trading near 162.50, well above the 158 level where the Ministry of Finance intervened last year. Dips in the USD/JPY caused by intervention are likely to be seen as buying opportunities by the market as long as the core interest rate differential persists. Traders should watch for verbal warnings from Japanese officials as a key signal that another intervention may be close.
This situation is reinforced by recent US economic data, which showed inflation coming in hotter than expected at 3.6%. This keeps pressure on the Federal Reserve to maintain its restrictive policy, supporting the dollar. Until the Bank of Japan makes a significant move toward policy normalization, the yen is likely to remain on the defensive.
