The Japanese yen, historically regarded as a key safe-haven currency that tends to strengthen in periods of financial stress, has not behaved as expected during the recent U.S. and Israel war with Iran.
Longstanding backstops for the yen - Japan’s substantial trade surplus and very large net international investment positions - once made it one of the foreign exchange market’s default refuges when global risk sentiment soured. Those structural advantages appear to have lessened, and market participants say the yen’s shelter qualities are now more contingent on specific conditions.
Joey Chew, head of Asia FX research at HSBC, said the yen "can be vulnerable to potential oil supply shocks - it also weakened last year in mid-June amid Israel-Iran tensions." That observation underlines a growing view in markets that the currency is particularly sensitive to energy-price movements.
Several forces have altered Japan’s balance of risks. China and other economies have taken market share from Japanese exporters. Meanwhile, energy imports have risen to compensate for output lost from the fleet of nuclear power plants that have remained idle since the Fukushima accident. At the same time, interest rates no longer provide the same steady anchor for the currency that they once did.
These shifts are playing out as the yen trades just below 160 per U.S. dollar - levels last seen around the July 2024 intervention intended to strengthen the currency. That proximity to post-intervention lows has market participants debating whether Tokyo will step in again if the currency weakens further.
Steve Englander, global head of G10 FX research at Standard Chartered, warned the yen "is very exposed to oil prices" and added that "on a further oil shock it could readily break 160." His comment highlights a key channel through which geopolitical shocks that lift oil prices could exert downward pressure on the yen.
Other analysts urge caution about expecting the yen to resume its traditional refuge role under current circumstances. Thomas Mathews, head of markets for Asia-Pacific at Capital Economics in Wellington, said: "Investors shouldn’t bank on the yen returning as a safe haven during the current crisis." He added, however, that this does not imply the currency’s safe-haven status is permanently extinguished.
Carol Kong, a currency strategist at Commonwealth Bank of Australia in Sydney, noted that the longer the conflict persists, the more it will weigh on global growth. Those weaker growth conditions would, in Kong’s view, create an environment that could help the yen recover.
Historical memories of stagflation influence current investor thinking. Following the 1973 Yom Kippur War and the subsequent Arab oil embargo, oil prices jumped and Japan’s consumer prices surged, with inflation reaching very high year-on-year increases in the following year. Those earlier episodes of stagflation have returned to the forefront of some investors’ minds as they consider the potential macroeconomic consequences of renewed energy disruption.
The link between oil and the yen, however, has not been stable. Since the COVID-19 pandemic, the relationship has repeatedly flipped from negative to positive and back again, illustrating that oil price shocks do not drive a single, consistent directional effect on the currency.
Another traditional predictor - the spread between Japanese and U.S. 10-year bond yields - has lost some of its former reliability as an indicator of yen direction. Market debate continues over which policy levers are most influential, with some pointing to spending measures by Prime Minister Sanae Takaichi’s government and others focusing on Bank of Japan balance-sheet activity.
Speculative positioning shows traders probing for a potential intervention threshold. Latest weekly CFTC data indicate an increasing net short yen exposure among speculative traders, a group that includes hedge funds. That build-up in short positions reflects questions about whether and when authorities would defend the currency.
Carry trades tied to the yen remain part of the market picture. Dollar-hedged yen carry strategies still appear to offer attractive returns after investors swap the local currency for U.S. dollars, with Japanese government bond yields providing higher absolute returns than comparable U.S. Treasury yields. But that appetite was not unbroken: Japanese bonds saw their largest weekly foreign outflow since mid-January in the week to March 7, suggesting volatility in foreign demand.
Outlook - The yen’s role as a haven is no longer automatic. Its sensitivity to oil, shifts in trade and energy balances, evolving interest-rate relationships and changing speculative positions mean that whether it strengthens during market stress depends heavily on the nature of the shock. Market participants continue to watch oil prices, yield spreads and official behavior for signals about how far the currency may move and whether authorities will seek to contain further depreciation.