CBA says rising oil prices from Iran war could weaken yen via trade balance

Rising oil prices linked to the Iran conflict may pressure the yen by worsening Japan’s trade balance, CBA says.

Summary:

• Analysts say higher oil prices linked to the Iran conflict could pressure the yen by worsening Japan’s trade balance.

• Japan is heavily dependent on imported energy, making the currency sensitive to rising crude costs.

• CBA economists say markets are increasingly focused on terms-of-trade effects stemming from the oil price surge.

• The bank also believes the threshold for yen-buying intervention by Japan’s Ministry of Finance has likely increased, as the recent USD/JPY rise reflects economic fundamentals rather than speculative pressure.

The Japanese yen, analysts pointing to rising oil prices as a potential source of renewed pressure on the currency.

According to research from Commonwealth Bank of Australia (CBA), the latest surge in crude prices linked to the Iran conflict is increasingly shaping market perceptions of Japan’s economic outlook and its currency.

Japan remains one of the world’s largest importers of energy, relying heavily on overseas supplies of crude oil and liquefied natural gas to meet domestic demand. As a result, sharp increases in global energy prices typically worsen Japan’s trade balance by raising the cost of imports relative to exports.

Analysts say the current market focus has shifted toward these terms-of-trade dynamics, with investors assessing how higher oil prices could affect Japan’s external balance and the outlook for the yen.

A deterioration in the trade balance tends to weigh on the currency over time, particularly when energy prices rise quickly. Higher import costs can increase the outflow of yen from Japan as companies pay more for foreign energy supplies, while export revenues may not rise at the same pace.

CBA notes that this dynamic has become a central theme in currency markets since tensions in the Middle East escalated, pushing oil prices sharply higher.

At the same time, the bank suggests the likelihood of Japanese authorities stepping in to support the yen may have diminished somewhat. Japan’s Ministry of Finance has previously intervened in currency markets when moves in the yen were viewed as excessive or driven primarily by speculative activity.

However, the current rise in USD/JPY appears to be largely explained by economic fundamentals, including interest rate differentials between Japan and the United States and the impact of higher energy prices on Japan’s trade balance.

Because of this, analysts believe policymakers may be more reluctant to intervene unless currency movements become significantly more disorderly.