Japan's yen sinks as spike in crude oil overpowers safe-haven appeal
FILE PHOTO: Holograms, which show different images and colours depending on the angle at which they are viewed, are seen on the new Japanese 1,000 yen banknote as the new note is displayed at a currency museum of the Bank of Japan, on the day the new notes of 10,000 yen, 5,000 yen and 1,000 yen went into circulation, in Tokyo, Japan July 3, 2024. REUTERS/Issei Kato/Pool/File Photo
TOKYO :The Japanese yen, normally one of the most sought after safe havens in times of geopolitical stress, has dropped 2.4 per cent against the U.S. dollar and 1.4 per cent against the Swiss franc since Israel launched missile attacks against Iranian nuclear and military targets on June 13.
CONTEXT
Japan imports almost all its oil, meaning the spike in crude since the start of the conflict threatens to worsen the country's trade balance, diminishing the yen's appeal.
When Russia invaded Ukraine on February 24, 2022, the yen weakened against the dollar on the same day and then lost some 11.5 per cent over March and April.
WHY IT'S IMPORTANT
Speculative positioning is still heavily skewed towards a stronger yen, potentially foreshadowing a major shift by hedge funds as they cover those positions.
The yen exchange rate has a knock-on effect for Japanese stocks as well, with a weaker yen tending to support the market because it increases the value of overseas revenue for the country's heavyweight exporters. However, the effect may be short-lived because of the jump in manufacturing costs from higher energy prices.
For Japan's unpopular government too, a weak yen fans inflation when people are already struggling with higher prices, particularly for rice. That's not a good omen ahead of crucial upper house elections next month.
KEY QUOTES
"A rise in crude oil prices causes a deterioration not only in Japan's trade balance but also its terms of trade, so it fundamentally acts to weaken the yen," Citi analysts wrote in a recent client note, while reiterating forecasts for the yen to weaken to 150 per dollar by September.
With the Bank of Japan also striking a dovish posture at last week's policy meeting, the compounded downward pressure on the yen from oil's rally could be amplified, they said.
