Summary
Heightened tensions in the Middle East have transformed the market environment. Oil prices have risen after Iran closed the Strait of Hormuz, risk assets have come under broad pressure, and bond yields have moved higher on inflation concerns. The FX market has also shifted into safe-haven dollar buying. The USD/JPY could treat 160 as little more than a waypoint if tensions fail to ease. Expectations of further yen weakness emerged, with some drawing parallels to the market reaction after Russia's full-scale invasion of Ukraine in 2022. Yen selling nevertheless remained limited, helped by the BOJ's hawkish stance. The BOJ has stepped up its vigilance toward upside inflation risks, and markets expect a rate hike in April. Excessive yen weakness should therefore be restrained.