As the Iran war triggers geopolitical shocks, the yen has not strengthened according to the traditional script of &#34;safe-haven assets,&#34; but instead has weakened, indicating a change in how investors are pricing its safe-haven function.
Since last Friday, the yen has fallen about 1% against the dollar, to 157.5 yen per dollar. This trend deviates from the past pattern where the yen often rose due to &#34;buying waves&#34; and rapid unwinding of carry trades during geopolitical tensions.
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After a significant weakening of the yen on Tuesday, Japan's Finance Minister Satsuki Katayama stated that the government is &#34;paying extremely close attention&#34; to market fluctuations and will take all necessary measures, including direct intervention. Analysts believe this statement temporarily &#34;supports&#34; the yen's decline, but downward pressure remains.
Bank of Japan Governor Kazuo Ueda stated on Wednesday that they are closely monitoring the impact of exchange rates on prices, and that it is crucial to maintain trust in the government's ability to keep fiscal conditions healthy.
Several strategists and economists attribute the yen's weakness to uncertainty regarding domestic policies and interest rate prospects in Japan, increased volatility leading to a decline in hedging functions, and the repricing of inflation and monetary policy paths in Japan following the rise in energy prices due to the Iran conflict.
<h2>Changing Safe-Haven Logic: Companies No Longer Repatriating Funds on a Large Scale</h2>
Neil Newman, a strategist at Astris Advisory Japan, bluntly stated, &#34;The yen is no longer a safe-haven asset.&#34; He pointed out that one of the important logics for the yen strengthening during past crises was the market's bet that Japanese companies would quickly repatriate overseas earnings.
However, this behavior pattern has changed. Neil Newman noted, &#34;Companies haven't done that for about four years,&#34; and instead, in the current economic environment in Japan, &#34;there is no incentive to bring back funds,&#34; with companies facing pressure to &#34;invest abroad&#34; and continuing to make significant overseas investments.
The traditional chain of &#34;crisis—repatriation—yen appreciation&#34; has broken, making the yen's response to geopolitical shocks weaker.
<h2>Policy Outlook Becomes a Drag: Increased Volatility Leads to Decreased Hedging Demand</h2>
The yen's weakness has not only occurred after the outbreak of the Iran war. Reports indicate that the yen has fallen nearly 5% over the past 12 months, with key variables affecting the market including Prime Minister Kishida Fumio's expansionary spending plans and his resistance to further interest rate hikes by the Bank of Japan.
Tai Hui, Chief Market Strategist for Asia Pacific at JP Morgan, believes that volatility has significantly reduced the yen's attractiveness as a hedging currency.
When assessing the situation in Iran, investors consider &#34;how to hedge risks without introducing unexpected risks.&#34; In his view, Japan is at a &#34;crossroads of more policies&#34; with a new government emerging, making the &#34;calculation of using the yen to hedge geopolitical risks unclear.&#34;
<h2>The Iran Conflict Amplifies Energy and Inflation Risks, Deepening Expectations for &#34;Delayed Rate Hikes&#34;</h2>
The war in Iran has also amplified Japan's macro vulnerabilities through energy channels. Reports indicate that Japan's heavy reliance on imported crude oil and natural gas means that rising energy prices due to the conflict will increase inflationary pressures.
Takahide Kiuchi, an economist at Nomura Research Institute, stated that rising commodity prices would make the Bank of Japan &#34;more cautious&#34; about raising interest rates. He added that the market's expectations for delayed rate hikes may further pressure the yen.
Additionally, the report mentioned that as part of a trade agreement reached with the Trump administration, Japan committed to investing $550 billion in the United States over the next three years in exchange for lower tariffs, which could further impact the yen's trajectory.
<h2>Intervention Expectations and Carry Trade Have Not Reversed: Risk Aversion Remains Moderate</h2>
Although expectations for official intervention have increased, the market has not experienced the typical &#34;rapid unwinding of carry trades—sharp yen appreciation&#34; seen in the past.
Naomi Fink, Chief Global Strategist at Amova Asset Management, stated that the lack of a clear reversal in carry trades indicates that &#34;risk aversion is not too extreme,&#34; and the market's reflection of the severity of the situation is not as pronounced as in &#34;physical markets&#34; like Baltic freight rates and war risk insurance.
On the exchange rate front, Koichi Sugisaki, a macro strategist at Morgan Stanley MUFG Securities, noted that the Japanese government is becoming &#34;increasingly open&#34; about the possibility of intervention, and if the yen approaches the 160 level, market caution will significantly increase.
For investors, this means that the yen may oscillate in the short term between &#34;downward pressure from fundamentals&#34; and &#34;the threshold for policy verbal intervention,&#34; with its safe-haven pricing being recalibrated

Since last Friday, the Japanese yen has fallen about 1% against the US dollar, which is different from the past when the yen rose due to corporate repatriation and unwinding of carry trades during geopolitical tensions. Analysts point out that the weakness of the yen is mainly due to the uncertainty of domestic fiscal policy, increased volatility leading to a decrease in yen hedging demand, and rising energy prices reducing expectations for interest rate hikes by the Bank of Japan. Bank of Japan Governor Kazuo Ueda stated that they are closely monitoring the impact of exchange rates on prices

- The Japanese yen has declined against the US dollar, dropping approximately 1% to 157.5 yen per dollar, despite geopolitical tensions from the Iran conflict.  
- Analysts attribute the yen's weakness to domestic policy uncertainties, rising volatility reducing its hedging appeal, and expectations of delayed interest rate hikes due to increased energy prices affecting inflation.  
- As businesses face pressures to invest abroad without incentives to repatriate earnings, the traditional chain linking crises to yen appreciation has weakened, leading to a reassessment of its role as a safe-haven currency.

Instead of rising, it has fallen! Has the yen's safe-haven property failed under the Iran conflict?