Japanese Yen: Conflict overhang delays recovery – Commerzbank

Commerzbank’s Volkmar Baur argues that the Japanese Yen will stay pressured in coming months as the Iran conflict keeps the Strait of Hormuz closed, sustaining high Oil prices and hurting Japan’s trade balance. Elevated energy costs also weigh on rate differentials versus the US and Eurozone, delaying any JPY recovery despite an ultimately constructive medium‑term outlook.

Iran shock and energy costs pressure yen

"The Japanese yen will therefore continue to be weighed down by the situation in Iran in the coming months. As long as uncertainty persists regarding the long-term security architecture in the Middle East, prices for fossil fuels are likely to remain high, which will weigh on the Japanese economy’s foreign trade balance."

"Furthermore, it has been evident in recent months - and continues to be so - that market expectations regarding the Bank of Japan are not influenced by rising oil prices. In contrast, market expectations regarding the Fed and the ECB rise significantly every time the oil price increases. This means that a rising oil price is currently also weighing on the interest rate differential between Japan and the US as well as the eurozone."

"We do not expect the market to change its view on this in the near future. Higher new borrowing will likely continue to weigh more heavily on the Japanese yen than, for example, on the US dollar. However, we expect this issue to recede further into the background once the Iran conflict ends and further support measures are no longer necessary."

"We assume that the market will once again focus more strongly on interest rate differentials as soon as the conflict in Iran is permanently resolved, the Strait of Hormuz reopens, and the oil price begins to fall. However, this development is likely to take some time and will not proceed in a linear fashion. Consequently, a stronger JPY is generally expected over the coming months. But this is unlikely to occur without fluctuations."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)