On Monday, Mimura said: “Some market participants have noted that speculative volatility in crude oil futures is affecting the foreign exchange market. Given the impact of exchange rate fluctuations on the economy and people’s daily lives, the government stands ready to take all possible steps at any time.”

 

Escalating conflict in the Middle East and rising oil prices have pushed up U.S. long-term Treasury yields and supported a stronger U.S. dollar. Following Mimura’s remarks, the yen briefly rose slightly to 159.02 against the dollar before turning lower. As of press time, USD/JPY was up 0.17% at 159.50.

 

Notably, as fears grow that a widening Middle East conflict will stoke inflation, Japanese government bonds (JGBs) fell on Monday, pushing yields back toward multi-decade highs. Data showed Japan’s 10-year JGB yield rose 6 basis points to 2.32%, approaching its highest level since 1999 hit in January this year. The 5-year JGB yield climbed 5 basis points to 1.72%, near its highest level on record.

 

JGBs tracked losses in U.S. Treasuries. After falling for a third straight week, U.S. Treasury yields rose to multi-month highs: the 2-year Treasury yield gained 18 basis points last week to 3.90%, while the benchmark 10-year U.S. Treasury yield surged 13 basis points to 4.38%, its highest level since late July last year.

 

Fighting in the Middle East has entered its fourth week with no signs of de-escalation. U.S. President Donald Trump issued a 48-hour ultimatum to Iran late Saturday, demanding it reopen the Strait of Hormuz or face strikes on its power plants. Iran responded that any such attack would prompt it to shut the waterway indefinitely and target U.S. and Israeli energy infrastructure in the region, signaling risks of further escalation from both sides.

 

The yen strengthened briefly last week to 157.51 per dollar, moving away from levels at which Japanese authorities are believed to be poised to intervene. The Bank of Japan (BOJ) kept interest rates unchanged last Thursday. Governor Kazuo Ueda adopted a cautious hawkish tone at the post-meeting press conference, leaving the door open for a rate hike in April and thereby supporting the yen.

 

Ueda said that while he remains vigilant over market volatility and deteriorating risk sentiment for the time being, if the underlying inflation trend is sustained, a rate hike cannot be ruled out even if the economy faces temporary pressure.

 

Although Ueda has kept the possibility of an April rate hike on the table, rising JGB yields and oil prices are deepening yen weakness. Rinto Maruyama, foreign exchange and rates strategist at Sumitomo Mitsui DS Asset Management, said: “The simultaneous rise in yields and depreciation of the yen can be interpreted as markets pressuring the BOJ to raise rates. We need to watch closely whether the BOJ decides to actually hike rates on this basis.”

 

Mimura’s warning signals that the Japanese government is prepared to consider a range of measures to counter exchange rate volatility. Japanese Finance Minister Satsuki Katayama also said last week that fiscal authorities stand ready to take decisive action against FX market volatility when needed.

 

Japanese authorities intervened repeatedly to prop up the yen in 2024 when the currency fell below the key 160 per dollar level. Beyond direct market intervention, in recent years Japanese officials have used various tools to curb speculative trading, including coordinated exchange rate checks with U.S. authorities and tripartite meetings of senior officials from the BOJ, the Ministry of Finance, and the Financial Services Agency.

 

Mimura also cited market views that recent speculative activity in crude oil futures has been one factor driving exchange rate swings. Japan relies on the Middle East for roughly 90% of its oil imports, so a prolonged conflict there risks pushing up domestic inflation.

 

According to Japan’s Ministry of Economy, Trade and Industry, Japanese gasoline prices rose to a record high of 190.8 yen per liter as of last week. In response, the Japanese government decided last week to subsidize refiners to keep gasoline prices at around 170 yen per liter. Similar measures will be applied to other fuels including diesel, heavy oil, and kerosene.

 

 

While the yen hovers near its lowest level of the year against the dollar, traders believe the bar for Japanese authorities to step into the market has become higher. Rising oil prices linked to the Middle East conflict and strong U.S. economic data are boosting the dollar on fundamental grounds, potentially making it harder for Japanese officials to justify market intervention.

 

Japan’s heavy reliance on energy imports from the Middle East means higher oil prices hurt the country’s fragile economic recovery and stoke inflation, naturally weighing on the yen. Meanwhile, the dollar benefits from safe-haven inflows, further reinforcing the yen’s downward trend — a contrast to January this year, when yen weakness appeared driven more by positioning and speculative momentum.

 

Japanese officials have repeatedly stressed they are focused on excessive volatility rather than defending a specific exchange rate level.

 

The yen received brief support last month when Japanese Prime Minister Sanae Takaichi won a landslide victory in the House of Representatives election. But it weakened again after media reports that she was cautious about further rate hikes and nominated two dovish members to the BOJ’s Policy Board.

 

In terms of policy credibility, international coordination, and market structure, the “effective space” and “trigger threshold” for Japanese FX intervention today are significantly more constrained than during rounds of action in 2022 and 2024. Back then, authorities intervened swiftly to counter sustained yen selling by speculators exploiting the widening U.S.-Japan rate gap, with relatively positive effects in supporting the currency.

 

Although officials including Mimura and Katayama have publicly stated readiness to take “decisive steps when necessary” — language in Japanese policy circles that clearly points to FX intervention — some FX analysts note the market is now led more by safe-haven dollar buying than pure speculative yen selling, meaning any intervention may not have as direct a damping effect as previous rounds.

 

Shota Ryu, foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, previously said: “Intervention by Japan now would not be very effective, as strong safe-haven dollar buying is likely to persist easily unless the Middle East situation calms down.” He added: “Intervention could even carry the risk that a rebound in the yen would encourage speculators to sell the currency again.”

 

Japan’s Ministry of Finance may still step in if the yen’s decline becomes faster, disorderly, and clearly deviates from orderly moves — especially around or below 160 per dollar. But for a lasting turnaround in yen weakness, a more likely catalyst would be a de-escalation in the Middle East, falling oil prices, or an earlier-than-expected BOJ rate hike to narrow the U.S.-Japan rate gap.