Tokyo Intervenes in FX Market Amid Iran Conflict and Rising Import Costs

The Japanese yen experienced a sharp recovery this week following suspected interventions by Tokyo officials aimed at stabilizing the currency. After plunging to a one-year low of approximately 160.72 against the U.S. dollar, the yen surged as much as 3% on Thursday and continued gains into Friday, though some of those gains were later pared. This intervention occurs against a backdrop of severe macroeconomic stress caused by the ongoing U.S.-Iran conflict. With the Strait of Hormuz effectively closed, Japan—which sources over 90% of its crude oil from the Middle East—is facing surging energy costs and heightened import inflation, which threatens to offset the benefits of a weaker currency for exporters. Monetary policy uncertainty is further complicating the landscape. The Bank of Japan recently maintained its key policy rate but revised its inflation outlook upward to 2.8% from 1.9%. Simultaneously, the central bank halved its 2026 economic growth forecast to 0.5%, signaling a hesitation to tighten policy that has unsettled the bond market. Consequently, Japanese government bond yields have reached multi-decade highs. This trend is driven by a combination of Prime Minister Sanae Takaichi's fiscal spending plans and a broader global downturn in sovereign debt as investors price in hawkish central bank shifts. Tokyo's actions risk diplomatic friction with Washington. Japan remains on the U.S. Treasury's monitoring list, and President Donald Trump has previously indicated that currency manipulation and trade barriers are key factors in calculating reciprocal tariffs.