Bank of America has warned that persistently elevated crude oil prices could continue to weigh on the Japanese yen. As Japan relies heavily on crude imports from the Middle East, higher oil prices increase the country’s import costs and place additional pressure on the currency.
According to the bank’s analysis, monetary policy differences between Japan and other major economies also contribute to yen weakness. While the Federal Reserve and several European central banks have historically responded to supply-side shocks with tighter policy, the Bank of Japan has largely maintained a cautious, wait-and-see approach. This divergence in policy direction has reduced support for the yen.
At the same time, domestic political pressure for additional fiscal stimulus—despite Japan’s already limited fiscal capacity—creates further downside risks for the currency. A decline in equity markets could also lead investors to rebalance portfolios away from bonds and toward stocks, which may push yields higher and steepen the Japanese government bond (JGB) yield curve.
Bank of America believes that authorities are unlikely to tolerate unlimited yen depreciation due to its potential impact on inflation and political stability. In such a scenario, policymakers would most likely respond first with foreign exchange intervention, followed by monetary tightening from the Bank of Japan if necessary.
However, intervening in currency markets during a period of broad U.S. dollar strength and elevated oil prices carries the risk of limited effectiveness. As a result, Bank of America suggests that the threshold for intervention may be significantly higher, potentially above the 160 level in the USD/JPY exchange rate. Structural shifts in global markets have also weakened the potential for a strong yen rebound driven by the unwinding of existing positions.
For now, cross-yen currency pairs such as EUR/JPY remain relatively stable. Nevertheless, if crude oil prices stay elevated for a prolonged period, the risk increases that yen depreciation could extend beyond the USD/JPY pair and accelerate across other yen crosses. While a position-unwinding rally in the yen remains possible, Bank of America notes that structural changes have made such an appreciation less likely than in previous cycles.
