Yen Underperforms as High Oil Prices Pressure, Dollar Rebounds

The dollar steadied and rose against the yen on Thursday, gaining about 0.55% on the day to trade around 159.071. Earlier, the dollar index had fallen to a three-month low before staging a modest rebound, helping the dollar/yen pair recover lost ground. Oil prices surged on heightened Middle East tensions, adding extra pressure on Japan's energy-import-dependent economy and further weakening the yen's performance.

**Oil Prices and Tariffs Double-Team the Yen**

Crude oil prices climbed sharply on geopolitical risks, directly raising import costs for Japanese companies and weighing on the yen. Meanwhile, new U.S. tariff policies took effect, rekindling market concerns over inflation and underpinning dollar strength. Market data showed that swap markets have almost fully priced in a rate hike by the Federal Reserve at its September policy meeting, with the divergence in rate expectations across the Atlantic continuing to widen, providing upward momentum for the dollar.

**Verbal Intervention Falls Flat, Yen's Weakness Hard to Reverse**

Japan's Finance Minister Katsunobu Kato reiterated on Friday that authorities stand ready to take action in the foreign exchange market. However, such remarks have had almost no effect in boosting the yen, reflecting investors' deep skepticism over the efficacy of purely verbal intervention. The yen has recently fallen to near multi-year lows, with its weak posture gradually forming a vicious cycle: importers, forced by failed hedging mechanisms, buy dollars at high prices in the spot market, further boosting dollar demand and exacerbating the yen's depreciation.

**SME Bankruptcy Wave Highlights Downside of Depreciation**

The negative effects of the yen's sustained weakness are accelerating. According to Tokyo Shoko Research, 45 Japanese companies went bankrupt due to yen weakness in the first half of 2026, up more than 30% year-on-year, marking a record high for the same period since data collection began in 2022. Numerous small and medium-sized enterprises reliant on imported raw materials face soaring costs, compounded by high energy prices and sustained wage increases. Wholesale, retail, and manufacturing sectors are under heavy strain, with many companies forced to exit the market as they struggle to pass on costs.