Bank of America warns that persistently elevated crude oil prices are a clear headwind for the Japanese yen, given Japan's significant dependence on imports of Middle Eastern crude. Higher energy costs increase import bills, which the research firm notes as a direct negative pressure on the currency.
The note emphasizes a divergence in policy responses as a further factor undermining the yen. Compared with the Federal Reserve and certain European central banks, which historically have shown a willingness to tighten policy in response to supply shocks, the Bank of Japan has adopted a more wait-and-see stance. BofA links this relative policy inaction to continued yen weakness.
Political dynamics also feature in the analysis. The research firm points to pressure for fiscal stimulus in Japan despite the country's limited fiscal capacity, a development that weighs on the currency. Separately, BofA highlights that a significant downturn in equity markets could trigger a portfolio rebalancing from bonds into equities, which would add steepening pressure to the Japanese government bond curve.
On policy responses to marked yen depreciation, Bank of America describes a likely sequence: foreign exchange intervention would come first, with the Bank of Japan tightening policy thereafter if depreciation persisted. However, the firm cautions that intervention, in the context of broad dollar strength and high crude prices, carries the risk of being ineffective. This implies that an effective intervention threshold for USD/JPY could be well above 160.
The research note also assesses structural market changes. BofA argues that such shifts have reduced the underlying potential for a yen rebound driven by position unwinds, meaning that a rapid appreciation of the yen from such forces is now less likely, though not impossible.
Cross-currency dynamics are a further consideration. While crosses like EUR/JPY are currently contained, the firm warns that if crude prices remain elevated, the risk increases that yen depreciation will accelerate across cross-yen pairs as well.
Bottom line: BofA points to a combination of high oil prices, policy divergence, political stimulus pressures, and structural market changes as factors likely to keep the yen under strain. Intervention could be the first line of defense, but its effectiveness is uncertain in the present environment.