The USD/JPY is approaching the psychological barrier of 160, beware of the vicious cycle of imported inflation and yen depreciation

Investment Insights - Negotiations Break Down! U.S. Military Blocks Iranian Maritime Traffic, Creating a Vicious Cycle of Imported Inflation and Yen Depreciation On Monday (April 13), the USD/JPY rose to a session high of 159.85, just a step away from the psychological level of 160. Previously, Japan's Finance Minister Shunichi Suzuki had hinted multiple times that intervention would occur at this level, drawing market attention. There is no doubt that the USD and JPY are experiencing divergent trends influenced by the geopolitical situation in the Middle East, with investors concerned that Japan is falling into a vicious cycle of imported inflation and yen depreciation. Last Sunday (April 12), U.S. and Iranian delegations held the highest-level face-to-face negotiations since 1979 in Pakistan, which ended in a breakdown of talks. The market is worried that the hasty and fragile ceasefire between the two sides indicates that the structural differences and hardline confrontational stance between the U.S. and Iran have not changed. To make matters worse, the U.S. Central Command announced that it would begin blocking all maritime traffic entering and exiting Iranian ports at 10 a.m. Eastern Time on the 13th. Iran is not allowed to profit from oil sales, and efforts to clear mines laid by Iran in the Strait have begun. WTI crude oil surged over 10% on Monday (April 13), breaking through the $100 mark to reach $105.6. A research report from the Commonwealth Bank of Australia stated that the U.S. threat to block the Strait of Hormuz could further escalate conflicts in the Middle East. The blockade directly threatens Iran's oil exports through the Strait, which averaged about 1.7 million barrels per day last month. Therefore, the blockade further tightens the physical market for oil and refined products. Oil benchmark prices reflecting physical delivery indicate that trading prices for oil are expected to exceed $140 per barrel in the coming weeks. The Bank of Japan's intention to raise interest rates to curb prices may struggle to prevent the bullish momentum at the 160 level for USD/JPY. Rising oil prices exacerbate inflationary pressures in Japan, leading to selling pressure on Japanese bonds. On Monday (April 13), the yield on Japan's 10-year bonds rose to 2.5%, the highest in 29 years. The market expects the Bank of Japan to consider raising interest rates at the end of this month, hoping to curb price increases by boosting the yen. However, it is important to note that Japan is facing imported inflation driven by supply-side factors, with Middle Eastern countries accounting for 95.9% of Japan's crude oil imports in the recent fiscal year 2024. According to data from the Bank of Japan, in March, the average exchange rate of the yen against the dollar depreciated by about 33% compared to the exchange rate when oil prices were at historical highs in 2008. In that month, the price of crude oil in yen increased by about 9,500 yen per barrel compared to the previous month. Although a stronger yen would help offset the impact of rising crude oil import costs, if the Bank of Japan fails to provide sustained favorable signals for interest rate hikes, it may be difficult for the market to believe that the normalization of the Bank of Japan's monetary policy will accelerate. More importantly, if the Bank of Japan significantly raises interest rates in the short term, it could lead to a reversal of carry trades, which would undoubtedly be a potential "gray rhino" event for the global economy already impacted by high oil prices. On the other hand, the risk of stagflation is rising under high oil prices, with funds flowing into the dollar seeking safe havens, while the possibility of the Federal Reserve cutting interest rates this year is also reduced. Last Friday (April 10), the U.S. March CPI surged by 0.9% month-on-month, marking the largest single-month increase since June 2022; Year-on-year increase to 3.3%, the highest level since 2024. The rise in gasoline prices set a record since 1967. Although the core CPI increased by 0.2% month-on-month, slightly lower than expected, the secondary transmission effects of energy shocks are expected to manifest in April. In summary, the resistance to the Bank of Japan's (BOJ) push for significant interest rate hikes remains substantial, and short-term currency interventions are unlikely to reverse the trend. Former senior foreign exchange official Takehiko Nakao previously warned that relying solely on foreign exchange reserves to intervene in the currency market can only provide short-term deterrence. To effectively curb the depreciation trend of the yen, it is necessary to form policy coordination with the BOJ's steady interest rate hikes. If the situation in the Middle East does not genuinely ease in the short term, the USD/JPY is expected to challenge levels of 160 or even 163.0. USD/JPY Technical Analysis: The psychological barrier of 160 may be breached. USD/JPY Daily Chart: Image source: tradingview The daily chart shows that the overall upward trend of USD/JPY remains strong, and it has been consolidating below the 160 level for the past month, indicating a strong willingness of bulls to push higher. If it breaks through the psychological barrier of 160, it may further challenge the 163 level. To reverse the upward trend, it must first fall below the 157.0 level