Yen slides to 162.3 per dollar, near 40-year low as oil surge weighs

The yen is trading at its weakest level in three decades as escalating US-Iran hostilities drive oil prices above $84 a barrel, compounding Japan's vulnerability as a net energy importer.

The Japanese yen traded at 162.3 per dollar on Monday, hovering near its lowest level since 1996, as a stronger dollar and surging oil prices — driven by the escalating conflict in the Middle East — continued to weigh on the currency. The US military carried out fresh airstrikes against Iran following the deaths of three American service members, while Tehran said its ceasefire with the US had effectively collapsed and that it intercepted four vessels transiting the Strait of Hormuz over the weekend.

"The yen's slide reflects a perfect storm of geopolitical risk premium in oil and the absence of any meaningful intervention signal from Tokyo," said Elena Fischer, geopolitical risk analyst at Edgen. "Japan imports roughly 90 percent of its crude from the Middle East, making it the most exposed major economy to supply disruptions through the Strait of Hormuz."

Brent crude climbed past $85 a barrel, while WTI traded above $84, as the Strait of Hormuz — which handles about 21 percent of global oil trade — became a flashpoint. Japan's reliance on Middle East oil leaves the yen particularly vulnerable to higher energy costs, which widen the country's trade deficit and put additional downward pressure on the currency. The yen has lost more than 12 percent against the dollar this year, making it the worst-performing major currency.

Investors saw little indication of decisive action from Tokyo to support the currency. Japanese authorities have historically intervened when the yen weakened beyond 150 per dollar, but the current level of 162 represents uncharted territory. The last time the yen traded near these levels was in 1996, when it briefly touched 163 per dollar before the Bank of Japan intervened. Intervention data due later this month may provide clues on whether Japanese authorities were behind the sharp but short-lived yen rallies seen in recent weeks.

Oil's Geopolitical Risk Premium

The renewed US-Iran hostilities have added an estimated $5 to $7 a barrel in geopolitical risk premium to crude prices, according to market estimates. Iran's interception of vessels in the Strait of Hormuz over the weekend marked a significant escalation, threatening the fragile truce that had held since earlier this year. The US revocation of waivers for Iranian oil exports further tightened supply expectations.

Higher oil prices feed directly into Japan's import bill. The country's trade deficit widened to 1.2 trillion yen in May, with energy imports accounting for roughly a third of the total. Each $10 increase in crude prices adds about 800 billion yen to Japan's annual import costs, according to estimates from the Japan Institute of Energy Economics.

Intervention Risks and Policy Constraints

The Bank of Japan's ultra-loose monetary policy remains a key driver of yen weakness, as the interest rate differential between Japan and the US continues to favor the dollar. The BOJ has maintained its short-term rate at minus 0.1 percent, while the Federal Reserve's benchmark rate stands at 5.25 percent to 5.5 percent — a spread of more than 550 basis points that makes the carry trade highly attractive.

Japanese authorities face a difficult choice: intervene to support the yen at the risk of depleting foreign reserves, or allow further depreciation that raises import costs for businesses and households. Finance Minister Shunichi Suzuki has repeated the standard warning that authorities are watching currency moves "with a high sense of urgency," but has stopped short of signaling imminent intervention.

The next major test for the yen comes later this month when US inflation data and the Federal Reserve's policy decision will set the near-term direction for dollar-yen. If the Fed signals further rate hikes, the yen could test 165 per dollar — a level that would almost certainly trigger intervention from Tokyo.

This article is for informational purposes only and does not constitute investment advice.