Japan just stepped up its currency warnings — and the dollar could feel it

• Japan's yen is sliding as the oil market hits the currency, prompting government intervention talks.
• The yen is nearing 160 per dollar, a key level that could prompt Japanese financial intervention.
• The yen-funded carry trade risks triggering volatility, impacting global capital flows and currency trends.

Japan is turning up the heat on currency markets again as the yen slides amid gyrations in oil markets — and the spillover could reach the dollar.

The dollar — a haven currency — is about 1.3% higher against the yen this year, with gains accelerating after the US and Israel attacked Iran. The greenback is up 5.9% against the Japanese currency over the past 12 months.

On Tuesday, Japanese Finance Minister Satsuki Katayama said that the government was ready to act "on all fronts" to address speculative volatility in the yen.

The yen was trading around 159 to the dollar on Tuesday — near the 160-per-dollar threshold where Japanese authorities could step in to support the currency, as they did in 2024.

Adding to the strain, rising oil prices are weighing on the yen.

Japan sources about 90% of its oil from the Middle East, meaning any prolonged conflict in the region could drive up import costs and stoke inflation at home.

Last week, Bank of Japan Governor Kazuo Ueda signaled that an April rate hike remains possible, which would support the yen.

That is now spilling over into currency markets as moves in the dollar-yen trade could ripple through global markets. That's because continued yen weakness tends to support the dollar by reinforcing carry trade flows into US assets.

In contrast, a sharp reversal could trigger an unwind of those trades, potentially pushing the dollar lower and amplifying volatility across global markets.

The yen carry trade risks

The yen has long been the funding currency for the so-called carry trade, where investors borrow cheaply in Japan and invest in higher-yielding assets abroad, particularly in the US.

That flow has been a quiet but important driver of global capital flows, and a key force behind yen weakness in recent years.

That dynamic briefly unraveled in the summer of 2024, when the yen surged against the dollar after the Bank of Japan's interest rate hike, triggering a wave of volatility across global markets.

The move was widely tied to a partial unwind of yen-funded carry trades, as a stronger yen forced investors to rapidly cut leveraged positions and sell risk assets.

That dynamic may not be done yet, said James Stanley, a senior strategist at Forex.com. He described the earlier unwind as "an abbreviated move" in a Monday podcast.

He said that "the big drive point behind the USD trends, it's going to be dollar yen," underscoring the pair's outsized role in shaping broader currency moves.