The Japanese yen, long considered one of the world's premier safe-haven currencies, has conspicuously failed to rally in the face of the US and Israel's conflict with Iran, raising fresh questions about whether its safe-haven status is a thing of the past.
The yen's traditional safe-haven appeal rested on Japan's large trade surplus and its enormous net international investment position, which historically prompted Japanese investors to repatriate capital during global crises. Those fundamentals have shifted. With China eroding Japanese exporters' market share, energy import costs rising to compensate for the nuclear plants idled after the 2011 Fukushima disaster, and interest rate differentials no longer reliably anchoring the currency, the yen's underpinnings have weakened substantially.
The currency is hovering just below the 160 per US dollar level, its weakest since Japanese authorities last intervened to prop it up in July 2024, keeping markets on edge over the prospect of fresh government action from Tokyo.
Oil Exposure
The yen's vulnerability is most acute on the oil price front. "The yen is very exposed to oil prices," said Steve Englander, global head of G10 FX research at Standard Chartered, adding that it "could readily break 160" on a further oil shock.
Joey Chew, head of Asia FX research at HSBC, noted that the yen "can be vulnerable to potential oil supply shocks," pointing out that it also weakened last June amid the earlier round of Israel-Iran tensions. The correlation between the yen and crude oil prices has whipsawed repeatedly since the Covid-19 pandemic, flipping from negative to positive and back again, making it an unreliable hedge.
The current crisis is stirring memories of the 1973 Arab oil embargo, which followed the Yom Kippur War and sent consumer prices surging across advanced economies. Japan was among the hardest hit, inflation peaked at 24.9 percent the following year as oil prices tripled. Those stagflation fears appear to be resurfacing in investors' minds as the Middle East conflict drags on.
Adding to the yen's troubles, the spread between Japanese and US 10-year bond yields, once a reliable directional indicator for the currency, has lost its predictive power. Whether the fiscal spending of Prime Minister Sanae Takaichi's government or the Bank of Japan's balance sheet activity is the dominant driver is now a matter of active debate among analysts.
Not Gone Forever
Not all analysts are ready to write off the yen's safe-haven role permanently. "Investors shouldn't bank on the yen returning as a safe haven during the current crisis," said Thomas Mathews, head of markets for Asia-Pacific at Capital Economics in Wellington, but he added that "it doesn't mean the yen's safe-haven status is gone forever."
Carol Kong, currency strategist at Commonwealth Bank of Australia in Sydney, wrote, "the longer the conflict persists, the more it will weigh on the global growth outlook. A deteriorating global growth picture," she argued, "could be the very condition that eventually helps the yen recover its footing."
