Recently, I noticed a quite interesting market phenomenon. The USD/JPY is approaching the 160 level this week, just one step away from the psychological threshold. This actually reflects the complex game of global geopolitical tensions and the outlook for the Japanese yen.

On Monday, USD/JPY rose to 159.85, and the market was watching whether Japan’s Finance Minister Shōzō Katō would intervene at the 160 level. But the problem is, pure currency intervention may have limited effect. Former senior Japanese foreign exchange official Takehiko Nakao once said that relying solely on foreign exchange reserves to intervene cannot fundamentally change the trend; it must be combined with the central bank’s sustained interest rate hikes.

The real reason behind the dollar’s strength and the yen’s weakness is still the Middle East situation. Last week, US-Iran negotiations in Pakistan broke down, and the US military announced maritime blockades of Iranian ports, as well as clearing mines in the Strait of Hormuz. This directly caused oil prices to surge, with WTI crude oil opening on Monday up over 10%, breaking the $100 mark to $105.6. Some institutions predict that if the blockade continues, oil trading prices could exceed $140 per barrel.

For Japan, this is a big trouble. The Middle East accounts for 95.9% of Japan’s crude oil imports, and rising oil prices directly increase inflationary pressures. On Monday, Japan’s 10-year government bond yield soared to 2.5%, hitting a 29-year high. The Bank of Japan is considering raising interest rates at the end of the month to curb prices, but there is a paradox: Japan faces supply-driven imported inflation, and rate hikes are actually quite limited. Moreover, if the central bank raises rates sharply in the short term, it could reverse carry trades, posing risks to the global economy.

Data shows that in March, the yen depreciated about 33% against the dollar (compared to the oil price peak in 2008), and the price of crude oil in yen per barrel increased by 9,500 yen from the previous month. Yen depreciation could offset some import cost pressures, but if the central bank cannot signal sustained rate hikes, the yen’s outlook will be very pessimistic.

On the other hand, high oil prices are also pushing up US inflation. Last Friday, the March CPI increased by 0.9% month-over-month, the largest single-month increase since June 2022, with gasoline prices reaching a record since 1967. This reduces the likelihood of the Federal Reserve cutting rates this year, and funds are flowing into the dollar as a safe haven.

From a technical perspective, the daily chart of USD/JPY shows strong bullish momentum, having been consolidating below 160 for the past month. Once it breaks through 160, it could further challenge the 163 level. To reverse the upward trend, a drop below 157 is needed.

Overall, if the Middle East situation cannot be stabilized in the short term, the yen faces continued depreciation pressure, and a breakout above 160 or even a move toward 163 in USD/JPY is very likely. This reflects the rising risk of global stagflation and the dilemma faced by the Bank of Japan. Those interested in tracking this trend can check the related currency pairs and commodities on Gate.