09.06.202600:49 Forex Analysis & Reviews: USD/JPY. Trading on a Powder Keg: The Yen Is at Risk Again

The yen is getting cheaper again. The USD/JPY pair jumped to 160.40 on Monday, thereby setting a five-week high.

The weakening of the Japanese currency is justified and well-founded, considering recent events in the Middle East. As is known, Japan is a net importer of energy resources; therefore, the latest round of Middle Eastern confrontation has had a negative impact on the yen. At the start of Monday's trading, global oil prices rose by more than 5% — in particular, the cost of a barrel of Brent oil surged above $98 (the first time since June 3).

As is known, Iran and Israel exchanged rocket strikes within a day, thus jeopardizing the fragile truce in the Middle East. Against the backdrop of a sharp surge in anti-risk sentiment and rising oil prices, the USD/JPY pair climbed to the middle of the 160 range.

However, buyers could not consolidate in this price area. After the price settled at 160.40, sellers seized the initiative in the pair. The yen gradually strengthened and eventually returned to the 159 range.

Interestingly, the pair began to decline for nearly the same reason it previously rose. Only the sign "minus" changed to a "plus." Initially, the market reacted to the risks of further escalation and the expansion of conflict in the Middle East; however, signals of possible de-escalation soon emerged. In other words, the geopolitical agenda remains the key driver for USD/JPY, but its tone has shifted from alarming to more positive.

First, the United States did not support the escalation scenario, signaling that the basic scenario for developments is diplomacy. Donald Trump refrained from making threats against Tehran and urged Israel not to retaliate for the Iranian rocket attack. And although the Israeli side "disobeyed" the White House (the IDF attacked Iranian facilities overnight), Washington continues to insist on de-escalation. On Monday, Trump stated on his social media that Israel and Iran "are striving for a truce."

Second, de-escalation signals also came from Tehran. Essentially, Iran announced the cessation of rocket strikes against Israel. According to media reports, representatives of the Israeli leadership and the U.S. previously relayed to Tehran that in the event of a halt to attacks, retaliatory strikes would also be stopped. Judging by the Iranian armed forces' statement, this offer was accepted: Tehran officially announced the cessation of operations. According to Israeli Channel 12, after this announcement, Trump and Benjamin Netanyahu held another phone call, thereby "cementing" the agreements reached. According to the NYT, the Israeli Prime Minister instructed the military to stop preparations for a new attack on Iran.

Against the backdrop of these messages, the USD/JPY pair fell nearly 50 pips, retreating from five-week highs.

An additional factor putting pressure on the pair is the risk of currency intervention. After all, the level of 160.00 is a kind of "red line" for the Japanese authorities. It was here at the end of April (when USD/JPY jumped to 160.70) that the Japanese Ministry of Finance deployed a record 11.7 trillion yen from its foreign exchange reserves to strengthen the national currency. The fact that the pair has returned to local highs indicates that the entire effect of the spring inflows has been completely neutralized.

Previously, in 2022–2024, actual (not verbal) interventions also occurred near price ranges of 150-160, which formed what traders refer to as a "range memory." Therefore, the market may begin to reduce long positions in anticipation of approaching the upper boundary of this range — in this case, the aforementioned level of 160.70.

Given the current circumstances, one should not underestimate the risk of renewed currency intervention. A weak yen drives up imported inflation in Japan, increasing business and household expenses for purchasing energy resources, thereby nullifying government efforts for budgetary support to the population. Apparently, Prime Minister Sanae Takaiichi and Finance Minister Satsuki Katayama are under serious political pressure within the country, as they have recently significantly tightened their rhetoric, stating their readiness to "take decisive measures" against excessive volatility and speculative movements in exchange rates.

It is also worth noting that just last Friday (June 5), the Japanese parliament passed an additional budget of 3.11 trillion yen (approximately $19 billion) in an urgent vote. The Takaiichi government undertook this just two months after the approval of the main annual budget. The devaluation of the yen, in this context, intensifies the burden and partially negates the stimulus package's effect, since rising prices for imported energy and raw materials increase the real cost of the budget and reduce purchasing power, diminishing the multiplier effect of additional government spending. It is evident that further USD/JPY growth may prompt retaliatory measures by the Japanese authorities.

Thus, long positions on the pair seem risky despite the ongoing tensions in the Middle East. Trump's peacekeeping efforts appear to be yielding some results — at least in terms of holding back further escalation. Moreover, the USD/JPY pair is approaching a high-risk zone, increasing the likelihood of currency intervention. Under these conditions, it would be advisable to adopt a wait-and-see position on the pair: further growth is associated with heightened risks, while the fundamental prerequisites for a sustainable reversal have yet to materialize.