Bearish Oil Price May Give Temporary Respite To Japan’s Yen Problem

Key Highlights

• A bearish tone for oil prices may take some pressure of the Yen
• Pressure is likely to return if the BoJ sticks to its low interest rates policy
• The Japanese government’s options to prop up the Yen are very limited

There have been a slew of announcements over the past week or so that are price negative for crude oil, including US supply increases, a new JCPOA deal, and a sustained drop in demand from China. For all developed world countries that are not self-sufficient in crude oil or other energy sources, this bearish pressure will be extremely welcome. This is particularly so for countries that are also suffering from the negative implications on their own currencies of a recent upsurge in the strength of the US dollar, in which crude oil is priced.

For Japan, the local currency pricing effect of the rise in USD-denominated petroleum and other liquid products – which still accounts for around 40 percent of its total energy consumption, with another 20 percent or so coming from natural gas – has been profoundly damaging.

The Yen had already been under intense speculative pressure as global capital continues to flow to where it is best rewarded for the relative risks involved, and the Japanese government continues in attempts to boost post-COVID growth by keeping its own domestic interest rates low.

This negative sentiment for the Yen has been exacerbated by the safe haven appeal of the US dollar during the ongoing Russian invasion of Ukraine and compounded by the prospect of further interest rate hikes from the US Federal Reserve. These factors, and the rising inflationary pressure from still-high oil prices, priced in US dollars but funded from Yen, saw a weakening through the key USDJPY125.00 psychological Yen support level very recently – a seven year low.

Difficult To ‘Buck The Market’ Forever

Although the currently more bearish tone for oil prices may give the Japanese government some breathing room in the FX market, as all serious traders know it is not possible to ‘buck the market’ for long based on intervention alone, either verbal or practical.

For the Yen, the prospects are worsened firstly by traders’ innate and professional desire to test all artificial trading limits, and it appears that USDJPY125.00 remains a key Yen support level for the government. The next key Yen psychological support level after that is USDJPY130.00. This is regardless of protestations from the Bank of Japan’s Governor Haruhiko Kuroda, who has repeatedly stated that “a weak yen is generally positive for Japan’s economy.”

Second, the Yen’s prospects are worsened by technical factors relating to any intervention aimed at propping up its value. One of these complicating factors is that Japan’s finance minister himself would have to give the order to use the country’s USD foreign currency reserves to sell in order to buy JPY.

A Billion Dollars Ain’t What It Used To Be

Although Japan has around USD1.38 trillion in reserves, it can disappear very quickly when trying to counteract the multi-trillion dollar daily FX market. As Nelson Bunker Hunt famously once said when he had tried – and failed – to corner the world’s silver market: “A billion dollars just ain’t what it used to be.”

Added to this problem is that such currency intervention would also need to be agreed upon in principle by other G7 countries, most notably the US itself, which has historically not been in favour of such activities except in extreme circumstances. The last occasion that Japan was able to intervene in this way was in 1998 to counteract the effects on the Yen of the Asia financial crisis.