Japan’s foreign exchange intervention erases yen’s Iran war losses

of JPY The currency soared against the dollar on Friday, extending the previous day’s gains after Tokyo officials said they were prepared to intervene in the foreign exchange market.

The Japanese currency rose as much as 0.7% against the dollar on Friday, extending Thursday’s gains of as much as 3% against the dollar.

By 5:35 a.m. ET, the yen had pared back much of Friday’s gains, but erased losses suffered since the U.S.-Iranian war began on Feb. 28.

Reuters reported on Thursday, citing unnamed sources, that Japanese officials had intervened to support the weak yen by buying yen.

Japan’s top foreign exchange diplomat, Jun Mimura, later told reporters, “I won’t comment on future responses. But I would like to say that Japan’s Golden Week holiday has just begun,” Japan’s top foreign exchange diplomat Jun Mimura later told reporters, fueling speculation that further intervention was being considered, according to the news agency.

The move came after Japan’s Finance Minister Satsuki Katayama said on Thursday that officials were close to taking “decisive action” in currency markets, after the yen fell to around 160.72 yen against the dollar, its lowest level in nearly a year.

A weaker yen could boost the domestic economy, for example by making Japanese products more attractive to overseas buyers. But it could also have negative effects, such as increasing the price of imported goods, exacerbating key issues facing the country as the conflict in the Middle East drags on.

Japan is a net importer of oil, with more than 90% of its crude oil imports coming from the Middle East. The soaring oil prices caused by the de facto closure of the Strait of Hormuz, a key shipping route that has been a central point of contention throughout the two-month war with Iran, has heightened concerns about Japan’s economic outlook.

The country’s debt burden has also increased over the past year as borrowing costs have increased. Yields on Japanese government bonds rose after Prime Minister Sanae Takaichi’s tax cuts and spending plans sparked a selloff, continuing to rise amid a significant downturn in global sovereign debt markets as investors priced in higher inflation after the Iran war and hawkish central bank policy. Yields on Japanese government bonds are currently at multi-decade highs.

Chris Igo, chief investment officer for core investments at BNP Paribas Asset Management, told CNBC’s “Squawk Box Europe” on Friday that Japan’s attitude toward assets has changed in recent years.

“For much of my career, the widower trades were long Japanese stocks and short Japanese government bonds. I think that has now switched,” he said. “I want to be long Japanese stocks because of what’s going on in technology and industry and robotics, but the macro picture is pointing toward higher interest rates. And I think the reason the yen has sold off is because the market has lost a little bit of confidence in the Bank of Japan.”

On Monday, the Bank of Japan kept its key policy interest rate unchanged, but raised its inflation outlook to 2.8% from 1.9% and halved its economic growth forecast for 2026 to 0.5%.

“The Bank of Japan is backing away from its tightening schedule since the start of the war,” Igo told CNBC. “I think that’s what’s worrying the bond market and that’s impacting the yen.”

Steve Englander, head of global G10 currency research and North American macro strategy at Standard Chartered Bank, told CNBC’s “Squawk Box Europe” on Friday that Japanese officials may be “feeling some pressure from the U.S. to keep a lid on” currency intervention.

Last year, the U.S. Treasury Department added Japan and eight other countries to its “watch list” of trading partners whose “exchange practices and macroeconomic policies merit close attention.” This came after President Donald Trump said last April that his administration factored in “currency manipulation and trade barriers” into the calculation of so-called reciprocal tariffs on countries.

But Englander said authorities had reached a point where “enough is enough” as the weaker yen worsened Japan’s price situation.

He explained: “They think the benefits brought by a weaker yen are not that great, especially since a weaker yen will further exacerbate the rise in oil prices in terms of reduced domestic purchasing power.”

He told CNBC that the episode in which yields correlate with a weaker yen is “really bad news when you think about market confidence.”

“So I think you’re thinking between the oil story and the US pressure story and the fact that it didn’t do them any good (they had to intervene),” he said. “Japan’s exports should be doing well, but they’re not. There’s a reason the yen is at 160 yen. It’s not firing on all cylinders.”

Looking ahead, Englander added that the market widely expects further intervention from Japan.

“What’s unclear is how much they’ve done[already]but it looks like they’ve intervened. The warnings we’ve received since then tell the market that they’re probably going to intervene again. That’s certainly what the options market is pricing in now.”

Jordan Rochester, head of FICC strategy for EMEA at Mizuho Bank, agreed in a note Friday morning that further intervention was likely imminent.

“We are not out of the woods yet,” he said. “Japan has been hinting at currency intervention for months, but it finally did so in confirmation to reporters yesterday.[Officials]made it clear that further intervention is likely again.”

However, Mr. Rochester questioned how much impact intervention in the foreign exchange market would have in terms of protecting Japan’s economy.

“Longer term, unfortunately for Japan, the longer this war/blockade continues and the higher oil prices remain, the currency will continue to be under pressure,” he said. “Forex intervention can only be so effective. For it to be truly successful, it will need some luck with lower oil prices and lower global interest rates.”