Bird’s-eye view of central Tokyo including Tokyo Tower at sunrise hours.
Vladimir Zakharov | Moment | Getty Images
The Japanese yen surged against the dollar on Friday, extending gains that came the previous day after officials in Tokyo said they stood ready to intervene in the foreign exchange market.
Friday saw the Japanese currency rise as much as 0.7% versus the greenback, extending a Thursday rally that saw it jump by as much as 3% against the dollar.
By 5:35 a.m. ET, the yen had pared a lot of Friday’s gains, but erased the losses incurred since the U.S.-Iran war began on Feb. 28.
USD/JPY
On Thursday, Reuters reported that Japanese officials had stepped in to prop up the faltering yen by buying the currency, citing anonymous sources.
“I won’t comment on what we’ll do ahead. But I will tell you that Japan’s Golden Week holidays have just started,” Japan’s top foreign exchange diplomat Atsushi Mimura later told reporters, according to the news agency, fueling speculation that further intervention was in the cards.
It came after Japanese Finance Minister Satsuki Katayama’s said on Thursday that officials were nearing “decisive action” in the FX market, as the yen fell to a 1-year low of around 160.72 against the dollar.
A weak yen can provide a boost to the domestic economy — for example, by making Japanese goods more attractive to overseas buyers. But it can also have adverse effects, such as making imports more expensive — exacerbating a key problem the country is facing as the conflict in the Middle East drags on.
Japan is a net importer of oil, with more than 90% of its crude oil imports sourced from the Middle East. The spike in oil prices prompted by the effective closure of the Strait of Hormuz, a critical shipping route that has been a central point of contention throughout the two-month Iran war, has fueled concerns about the outlook for Japan’s economy.
The country’s debt burden has also risen over the past year as borrowing costs have grown. Yields on Japanese government bonds rose after Prime Minister Sanae Takaichi’s tax-cutting and spending plans triggered a sell-off, and continued to rise amid a broad downturn in global sovereign debt markets as investors priced in rising inflation and hawkish central bank policy in the wake of the Iran war. Japanese bond yields now sit at multi-decade highs.
Japanese government bonds
Chris Iggo, chief investment officer for core investments at BNP Paribas Asset Management, told CNBC’s “Squawk Box Europe” on Friday that attitudes toward Japanese assets had shifted in recent years.
“For a lot of my career, the widow-making trade was being long Japanese equities, and short Japanese bonds. I think it has switched now,” he said. “I think you want to be long Japanese equities, because of what’s happening in technology and industrials and robotics, but the macro situation is pointing towards higher rates. And I think why the Yen has sold off is that the market has lost a little bit of confidence in the Bank of Japan.”
On Monday, the Bank of Japan held its key policy rate steady, while hiking its inflation outlook to 2.8% from 1.9% and halving its economic growth forecast for 2026 to 0.5%.
“The Bank of Japan is stepping back from its tightening schedule since the war started,” Iggo told CNBC. “And I think that’s what’s worrying the bond market and that’s what’s affecting the yen.”
Steve Englander, Head, Global G10 FX Research and North America Macro Strategy at Standard Chartered Bank, told CNBC’s “Squawk Box Europe” on Friday that Japanese officials may have “felt some pressure from the U.S. to keep a lid on” foreign exchange interventions.
Last year, the U.S. Treasury Department added Japan and eight other economies to a “Monitoring List” of trading partners “whose currency practices and macroeconomic policies merit close attention.” It came after President Donald Trump said last April that his administration had factored “currency manipulation and trade barriers” into calculating his so-called reciprocal tariffs on individual countries.
But Englander said authorities had reached a point where “enough is enough” as the weak yen worsened the pricing picture in Japan.
“I think that they don’t see much good coming from a weaker yen, especially because the yen weakness exacerbates oil price hikes in terms of reducing domestic purchasing power,” he explained.
He told CNBC that episodes where yields correlated with a weaker yen were “really bad news as far as market confidence goes.”
“So I think that between the oil story, the U.S. pressure story, and the fact that it’s just not doing them any good [they had to intervene],” he said. “Japanese exports should be booming, but they’re not. There’s a reason the yen is at 160 — they’re not firing on all cylinders.”
Looking ahead, markets are broadly anticipating further intervention from Japan, Englander added.
“What’s unclear is how much they [already] did, but it does look as if they intervened, and the subsequent warnings that we’ve gotten are telling the market that they probably will intervene again, and that’s certainly what options markets are pricing right now,” he said.
In a note on Friday morning, Jordan Rochester, head of FICC strategy for EMEA at Mizuho Bank, agreed that more intervention is likely imminent.
“We are not out of the woods,” he said. “Japan has been threatening FX intervention for months and has now, by confirming it to reporters yesterday, finally delivered. [Officials] have made it clear that more intervention can follow again.”
But Rochester questioned how impactful the intervention in currency markets would be in terms of safeguarding the Japanese economy.
“Longer term, unfortunately, for Japan the currency will remain under pressure the longer this war/blockade goes on and oil remains strong,” he said. “FX intervention will only get them so far. For the FX intervention to truly succeed it will need a bit of good luck with lower oil prices and global interest rates.”
