‘Yen Strengthens in a Crisis’ Rule Breaks Down… Middle East Jitters Accelerate Yen Weakness

Yen slides to 158 per dollar

‘Buy the safe-haven yen in a crisis’ no longer holds

With the U.S. and Israel’s strikes on Iran marking one week on the 7th, the foreign-exchange market is seeing Japan’s yen weaken. Behind the move are efforts to secure dollars—the world’s reserve currency—and expectations that the Sanae Takaichi administration will loosen policy further as oil prices rise. Analysts say the old rule of “buy yen in a crisis” has broken down.

According to Yomiuri Shimbun and Asahi Shimbun, the yen-dollar rate in offshore trading on the 6th at one point rose to the 158-yen range per dollar (meaning the yen’s value fell). It is the highest level in about a month and a half since mid-January. The yen-dollar rate had retreated to the 152–153 range per dollar in mid-February, but has been climbing since the U.S. airstrikes on the 28th of last month.

The market is seeing broad-based dollar buying. With uncertainty sending futures prices for stocks and commodities such as crude oil and gold swinging sharply, investors are moving to hold dollars as a hedge against risk. The “dollar index,” which tracks the dollar’s value against major currencies including the euro and yen, stood at 97 as recently as the 27th of last month, before the U.S. strikes, but rose to 99 on the 6th.

Another factor behind the yen’s weakness is the continued rise in international crude futures prices as the Strait of Hormuz—an oil-shipping chokepoint in the Middle East—has effectively been sealed off. Higher oil prices feed into inflationary pressure for items such as food. In the market, concerns are growing that the Takaichi administration will have little choice but to increase fiscal spending to address high prices, further worsening Japan’s public finances.

Japan’s heavy reliance on overseas energy is also cited as a driver of yen weakness. Japan sources 95% of its imported crude from the Middle East. South Korea, where the won has also fallen by nearly 3% against the dollar, faces a similar situation. By contrast, resource-rich countries with an “energy trade balance” surplus, such as Canada, have seen their currencies decline comparatively less. If the Strait of Hormuz closure drags on, the pressure for yen depreciation is expected to intensify.

The United States became a net energy exporter through the “shale revolution.” In times of crisis, demand for U.S. energy increases, and rising prices boost the profitability of energy companies. Expectations that a spike in crude prices will accelerate U.S. inflation and make it harder to cut the policy rate are also underpinning dollar strength.

In the past, when wars or major disasters struck Japan, investors often bought the yen as a perceived “safe asset.” The logic was that Japanese companies holding substantial overseas assets would sell those assets and convert the proceeds from local currencies into yen, lifting the yen’s value.

During the Great East Japan Earthquake on March 11, 2011, the yen strengthened by about 6 yen through the 17th from around 82 per dollar. The yen also appreciated when COVID-19 spread globally in 2020. However, since Russia’s invasion of Ukraine in 2022, crisis-driven yen strength has not been prominent. The impact came as the U.S. and Europe raised policy rates, widening the interest-rate gap with Japan.

Tokyo=Correspondent Kim Il-gyu black0419@hankyung.com