The Japanese Yen (JPY) has come under renewed pressure as surging oil prices, driven by escalating geopolitical tensions in the Middle East, worsen Japan’s terms of trade and heighten fiscal risks, according to OCBC strategists Sim Moh Siong and Christopher Wong [1]. The USD/JPY pair edged higher to around 159.00 during early European trading hours on Wednesday, reflecting the Yen's weakness against the US Dollar [2]. Japan’s large dependence on Middle Eastern energy imports makes the currency particularly sensitive to geopolitical shocks, and the recent oil spike has sustained downside risks for the Yen [1][2].
US-Iran peace talks have introduced some volatility to energy markets. US President Donald Trump stated that progress was being made in negotiations to end the conflict with Iran, and Reuters reported that Washington had sent Iran a 15-point settlement proposal [2][3]. However, the situation remains uncertain, as Iran's Revolutionary Guards claimed to have fired missiles at Israel and US military bases in Kuwait, Jordan, and Bahrain [2]. MUFG’s Michael Wan noted that Brent oil prices fell to around US$100 per barrel as the Dollar weakened on signs of US-Iran talks, but cautioned that negotiations are likely to be very difficult due to Iran’s hardline stance and regional sensitivities [3]. The US reportedly sent its elite 82nd Airborne unit to the region, maintaining the risk of military intervention [3].
Despite a hawkish tone from the Bank of Japan's January Minutes, which indicated policymakers favored continued rate hikes and timely action to address inflationary pressures and the weak Yen's impact on prices, the currency remains soft [2]. OCBC expects an April BoJ hike but maintains its end-2026 USD/JPY target at 155, warning that FX intervention becomes more likely near 160 as geopolitical risks and energy dependence persist [1]. Markets remain alert to potential intervention, with Reuters reporting that Japan's Ministry of Finance has explored the idea of oil futures intervention, though OCBC sees FX intervention as more likely [1].
MUFG advises clients in Asia to consider additional hedges or reduce risk exposure as negotiations remain fragile and the outlook for energy prices is uncertain [3]. The ongoing conflict and negotiation risks are expected to keep oil volatility elevated, impacting currencies sensitive to energy prices, such as the JPY [1][3].
CONCLUSION
The Japanese Yen continues to face significant downside risks amid rising oil prices and persistent geopolitical tensions in the Middle East. While US-Iran negotiations have led to some volatility in energy markets, analysts remain cautious about the prospects for a resolution. Market participants should remain vigilant, as further Yen weakness and potential FX intervention are possible if oil prices stay elevated and negotiations falter.