I just looked at a set of market data, and the recent rally in USD/JPY is indeed worth paying attention to. On Monday, USD/JPY approached 159.85, just shy of the 160 psychological level. The market is waiting for Japanese Finance Minister Shōzō Katō's response, as he has previously hinted at intervention at the 160 level.

But the problem is, relying solely on exchange rate intervention may be difficult to change the overall trend. The divergence in USD/JPY this time mainly stems from escalating tensions in the Middle East. Last week, the US-Iran delegation held the highest-level talks in Pakistan in 79 years, but they still broke down. More seriously, the US Central Command announced plans to impose a maritime blockade on Iranian ports, directly cutting off Iran’s oil exports.

The chain reaction of this move is obvious. WTI crude oil prices surged over 10% at Monday’s open, breaking through the $100 mark and jumping to $105.6. According to analysis from the Commonwealth Bank of Australia, this blockade could further escalate Middle East conflicts and directly threaten Iran’s oil exports through the Strait of Hormuz. Last month, Iran’s daily exports were around 1.7 million barrels, now blocked, with physical delivery-based oil benchmark prices exceeding $140 per barrel.

This is a big headache for Japan. Middle Eastern countries account for nearly 96% of Japan’s crude oil imports, so rising oil prices directly push up Japan’s imported inflation. On Monday, Japan’s 10-year government bond yield shot up to 2.5%, a 29-year high. The market expects the Bank of Japan to raise interest rates at the end of the month to curb prices, but there’s a contradiction—Japan’s inflation is driven by supply-side shocks, so rate hikes may have limited effect.

Even more problematic is the depreciation of the yen. According to Bank of Japan data, the average yen-to-dollar exchange rate in March depreciated about 33% compared to the peak oil prices in 2008. This means that even with limited oil price increases, the cost of imported crude oil in Japan is still rising. In that month, the price of crude oil in yen per barrel increased by 9,500 yen compared to the previous month.

So, the central bank is caught in a dilemma. If it raises rates sharply to stabilize the yen, it could trigger a reversal of carry trades, posing a potential risk to the global economy. If it doesn’t raise rates, the yen will continue to depreciate, and the vicious cycle of imported inflation will be hard to break. Moreover, the oil price shock is also pushing up CPI in the US, with March CPI rising 0.9% month-over-month last Friday, the largest monthly increase since June 2022. Gasoline prices even hit a record since 1967. As a result, the likelihood of the Federal Reserve cutting rates this year diminishes, and the dollar’s safe-haven appeal actually strengthens.

Former senior foreign exchange official Takahiko Nao warned that intervention relying solely on foreign exchange reserves can only serve as a short-term deterrent. To truly curb yen depreciation, the central bank must coordinate steady rate hikes. But the current situation is that rate hikes face significant resistance, and currency interventions are unlikely to reverse the trend. If the Middle East situation doesn’t ease in the short term, USD/JPY could break through 160 and even surge toward 163.

From a technical perspective, the daily chart of USD/JPY shows the upward momentum remains strong, with the past month consolidating below 160, and bulls showing a clear desire to push higher. Once it breaks through the 160 psychological level, the next target is 163. To reverse this rally, it would first need to fall below 157. The current issue is that geopolitical tensions remain unresolved, and central bank policies are constrained, so this upward channel for USD/JPY may continue.