Japanese 10-year yields have climbed to 2.37%, their highest level since 1999. As a country heavily dependent on Middle Eastern oil, Japan is directly exposed to the surge in energy prices.
Investors are clearly concerned about an imminent spike in inflation and have already started pricing in a policy rate hike, which appears likely as soon as the end-April meeting.
Coal and energy reserves may not be enough
In Tokyo, authorities are proactively mitigating the situation through emergency measures, including operating older coal-fired power plants at full capacity. Japan maintains substantial energy reserves.
Without a full reopening of the Strait of Hormuz, Japan will continue to be one of the most exposed economies to current geopolitical tensions.
Pressure coming from different sources
This environment is driving the yen dangerously close to the crucial threshold of 160 JPY per US dollar. Such levels will force the Bank of Japan to intervene to support the yen.
The simultaneous surge in oil prices and the US dollar against the yen is delivering a double blow to the Japanese economy, strengthening the immediate case for intervention.
For now, we remain cautious on Japanese financial assets at this stage. See our complete investment recommendation.