Not rising, but falling! Amid the Iran conflict, has the yen's safe-haven status failed?

As the Iran war triggers geopolitical shocks, the yen has not strengthened as a “safe haven asset” according to tradition, but has weakened instead, indicating that investors are changing how they price its safe haven function.

Since last Friday, the yen has fallen about 1% against the dollar to 157.5 yen per US dollar. This trend runs counter to the previous pattern where the yen would rise during geopolitical tensions thanks to buying sprees and rapid unwinding of carry trades.

After the yen sharply weakened on Tuesday, Japan’s Finance Minister Satsuki Katayama said the government is monitoring market volatility with “a very high sense of urgency” and will take all necessary measures, including direct intervention. Analysts believe this statement temporarily “bottomed out” the yen’s decline, but downward pressure remains.

Bank of Japan Governor Kazuo Ueda said on Wednesday he is closely watching the impact of exchange rates on prices; currently, exchange rates are more likely to affect corporate behavior. He added that trust in the government to maintain healthy finances is crucial.

Several strategists and economists attribute the yen’s weakness to uncertainty about domestic policy and interest rate outlook, falling hedging functionality due to increased volatility, and the repricing of inflation and monetary policy paths after energy prices rose in the wake of the Iran conflict.

Safe Haven Logic Shift: Companies No Longer Repatriate Funds En Masse

Neil Newman, Japan strategist at Astris Advisory, commented, “The yen is no longer a safe haven asset.” He noted that a key reason for the yen’s historical strength during crises was bets that Japanese companies would quickly repatriate overseas earnings.

But this behavior has changed. Newman said, “Companies haven’t done that for about four years now.” Instead, given the current economic environment in Japan, “there’s no incentive to bring money back,” and companies are actually under pressure to “invest overseas” and continue to do so actively.

The traditional “crisis—repatriation—yen appreciation” chain is broken, making the yen’s response to geopolitical shocks much weaker.

Policy Outlook Is a Drag: Rising Volatility Reduces Hedging Demand

The yen’s weakness is not only seen since the outbreak of the Iran war. Reports say that the yen has fallen by nearly 5% over the past 12 months, and key factors include Prime Minister Sanae Takaichi’s expansionary spending plans and her resistance to further rate hikes by the Bank of Japan.

Tai Hui, Chief Market Strategist for Asia Pacific at J.P. Morgan, believes that volatility has significantly lowered the yen’s appeal as a hedging currency.

When assessing the situation in Iran, investors consider “how to hedge risk without introducing unexpected risks.” In his view, Japan is at “more policy crossroads” with a new government, making the calculation to use yen for hedging geopolitical risks “unclear.”

Iran Conflict Amplifies Energy and Inflation Risks, Deepens “Delayed Rate Hike” Expectations

The Iran war also amplifies Japan’s macroeconomic vulnerabilities via energy channels. The report notes that Japan relies heavily on imported oil and natural gas for energy, and the conflict-driven rise in energy prices will increase upward inflation risk.

Nomura Research Institute economist Takahide Kiuchi said that rising commodity prices will make the Bank of Japan “even more cautious” about raising rates. He added, expectations of delayed rate hikes may further pressure the yen.

In addition, the report mentions that, as part of a trade agreement with the Trump administration, Japan committed to invest $550 billion in the United States over three years in exchange for lower tariffs, which may also affect the yen’s movement.

Intervention Expectations and Carry Trades Not Reversed: Risk Aversion Not Extreme

Although expectations for official intervention are increasing, the market has not seen the usual “rapid unwinding of carry trades—yen surge.”

Naomi Fink, Chief Global Strategist at Amova Asset Management, said, the lack of a clear reversal in carry trades shows that “risk aversion is not very extreme,” and the market’s reaction to the severity of the situation is not as obvious as in physical markets like Baltic shipping or war risk insurance.

On the currency side, Koichi Sugisaki, Macro Strategist for Japan at Morgan Stanley MUFG Securities, noted that the Japanese government is “increasingly transparent” about the possibility of intervention, and if the yen approaches the 160 mark, cautious sentiment in the market will rise significantly.

For investors, this means the yen will likely tug-of-war in the short term between “fundamental downward pressure” and the “threshold for verbal policy intervention,” and its safe haven pricing is being recalibrated.

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