Yen Struggles as Energy, Geopolitics Outweigh Strength

Key Moments

Macro Pressures Counter Improved Japanese Fundamentals

The Japanese Yen (JPY) remains under pronounced downward pressure, with USD/JPY once again trading above the critical 160.00 mark. This weakness persists even as Japan posts a sharply higher current account surplus and anticipation builds ahead of the next Bank of Japan (BoJ) policy meeting, where an interest rate increase is seen as almost fully priced in by markets.

These supportive domestic developments are being overshadowed by a more challenging global backdrop. Elevated energy prices and ongoing geopolitical frictions are shaping investor sentiment, keeping major financial institutions focused on a soft near-term trajectory for the Japanese currency.

USD/JPY daily chart. Source: FXStreet.

Domestic Strength Versus External Shocks

Commerzbank analysts highlight that Japan’s underlying economic position is firming, underpinned by what they describe as a notably high current account surplus. This improvement, in their view, signals growing independent resilience in the Japanese economy.

However, they emphasize that these internal positives are being sidelined in the FX market. Instead, fluctuations in global commodities and the impact of international conflicts are exerting greater influence on the Yen’s valuation.

As they note: “In the short term, however, the exchange rate will continue to be determined primarily by the Iran conflict and the price of Oil.”

BoJ Tightening Expectations Already Priced In

On the policy front, MUFG strategy specialists focus on the BoJ’s expected move toward further normalization. They point out that participants have already built in significant tightening steps, including potential interest rate increases and possible adjustments to Japanese government bond purchase programs.

Given this backdrop, MUFG argues that these actions are unlikely to generate a standalone rebound in JPY. According to their assessment, any meaningful recovery is contingent on a moderation of international commodity pressures.

Reflecting this view, they state: “Overall, the latest developments have not changed our view that the Yen is likely to remain weak in the near-term until the worst of the energy price shock begins to fade.”

Banks Maintain Bearish Near-Term Yen Outlook

Both Commerzbank and MUFG retain a negative stance on the near-term trajectory of the Japanese currency. Commerzbank stresses that external factors, particularly Oil prices and geopolitical developments, are expected to outweigh incremental domestic improvements when it comes to USD/JPY pricing over the coming months.

In parallel, MUFG anticipates that the Yen will continue to struggle for sustained upside. The bank suggests that even if the BoJ proceeds with expected rate hikes and further policy normalization, these steps alone are unlikely to trigger a durable reversal in JPY weakness while global energy market disruptions remain pronounced.