Oil prices surge to $110, is the USD/JPY at 161 a disaster?

Tongtung Finance APP News—— On Tuesday, April 7, the USD/JPY exchange rate was kept around 159.60, fluctuating within a range, with a slight move from the previous trading day. Earlier, the exchange rate had briefly broken above 160 at the end of March, which tightened market sentiment. The ongoing evolution of the Middle East situation has continued to push oil prices to stay above $110 per barrel. As Japan is a major energy-importing country, it faces significant exchange-rate pressure.

The latest data show that in the Bank of Japan’s March Tankan survey, the business sentiment index for large manufacturers rose to 17, exceeding expectations and reaching the highest level in recent years, providing some fundamental support for the yen. However, with oil-price factors still dominating, the risk of further upside in the exchange rate remains prominent. Analysis institutions warn that if there is no substantial correction in oil prices, USD/JPY may continue to face upward pressure; the risk of actual intervention in the 161 to 163 range is worth watching closely.

Current FX Trends and Potential Intervention Thresholds

In recent performance, the USD/JPY exchange rate has shown clear characteristics of volatility. After briefly touching above 160 last Friday, Japanese authorities have strengthened verbal intervention; market optimism about further USD strength has accordingly cooled. However, geopolitical risks remain in place. With oil prices staying at high levels, yen short positions are difficult to completely close out. The analysis points out that while expectations of actual intervention may limit further upside in the exchange rate, unless the Middle East situation shows clear improvement and oil prices undergo a sizable pullback, the upward pressure on USD/JPY is likely to persist. This judgment is based on the reality that current market trends are difficult to reverse, while also considering the solidity of the Bank of Japan’s fundamentals.

Historically, similar high-range zones have been tested many times. Authorities’ intervention strategies have typically shifted from verbal warnings to substantive actions, in order to minimize reserve consumption as much as possible and maintain market order. In the 161 to 163 range, once the exchange rate starts to become unstable, further upside pressure will quickly be amplified. At this time, the deterrent effect of buying yen operations is most significant—it can effectively break the continuation of speculative trends and reduce the transmission of exchange-rate volatility to the real economy. Traders need to note that this kind of threshold setting is not fixed; it is adjusted dynamically based on multiple factors such as oil-price transmission, the inflation path, and business confidence. Although the exchange rate is currently hovering around 159.60, any change in geopolitical headlines could trigger rapid position shifting and magnify intraday swings. Overall, this range has become the market’s focus. Intervention expectations themselves have formed a near-term upper limit; but if oil prices remain high, the risk of a breakout still exists.

Deeper Impact of Oil Prices on the Exchange Rate

The international crude oil market is currently showing a high-level, range-bound pattern. Brent crude’s latest quote is $108.69 per barrel, and WTI crude is $111.43 per barrel, up about 9% and 10%, respectively, from last month. This price level is mainly driven by the Middle East situation. As a Japan-dependent energy economy, Japan’s import costs increase significantly, leading to a deterioration in trade conditions and amplifying import-driven inflation pressure. Analysis shows that for every $10 per barrel rise in crude oil prices, it may cause negative drag on Japan’s economic growth of about 0.4% to 0.6%, while also lifting companies’ production costs and the consumer price index. Although some companies mitigate the pressure by passing through prices, overall, the appeal of the yen as a safe-haven currency declines, further reinforcing the relative strength of USD/JPY.

If oil prices cannot fall back from current high levels, structural downside risks in the exchange rate will be difficult to alleviate. The oil-price transmission mechanism mainly works through two channels: trade balance and inflation expectations. First, it directly worsens the current account; second, rising corporate costs indirectly affect wage negotiations and consumer confidence; finally, this is reflected in exchange-rate pricing as yen pressure. Oil prices are already close to high levels seen in recent years, so any supply-side disruption could further push up the numbers, thereby extending the upward window for USD/JPY.

Bank of Japan Fundamentals and Policy Path

The results of the March Tankan survey released by the Bank of Japan on April 1 show that the business sentiment index for large manufacturers rose to 17, improving from 16 after revision for the previous quarter—its highest level since December 2021. The business sentiment index for large non-manufacturers also remains around a high level near 36. The outlook index was slightly lowered, but overall business confidence remains solid. The Bank of Japan branch presidents’ meeting to be held this week; if it releases positive signals, it will further increase the likelihood of a rate hike in April.

Current market expectations indicate that the probability of implementing a rate hike at the policy meeting on April 28 is close to 70%. These factors provide near-term support to the yen exchange rate and help ease some downward pressure. However, against the backdrop of oil prices remaining persistently high, policy decisions need to balance the inflation path with economic growth. Tightening may be relatively cautious and cannot fully offset exchange-rate shocks brought by geopolitical factors. The robustness of the Tankan data reflects firms’ optimistic judgment about domestic demand. To a certain extent, this offsets external shocks, but the delayed effect of oil-price transmission may still postpone the appearance of policy impact.

Analysis suggests that rate-hike expectations themselves can boost the yen’s attractiveness by increasing holding costs and suppressing short positions, but the magnitude is limited by the oil-price variable. If crude oil remains above $110 per barrel, the support role of policy normalization for the exchange rate will be partially diluted. As an important window for policy signals, the tone of the branch meeting will directly affect the market’s pricing logic for the April meeting, thereby shaping the near-term USD/JPY range.

(Editor: Wang Zhiqiang HF013)

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