The Strait, the Yen, and the Unwind Nobody Sees Coming

Oil Priced in Yen Is the Real Tail Risk — and Japan’s Political Class Is Asleep at the Wheel

KEY HIGHLIGHTS

• The BOJ held at 0.75% on March 19 in an 8-to-1 vote while Brent crude spiked above $110 — two sides of the same trade converging in real time.

• Japan imports 95% of its oil from the Middle East; 70% transits the Strait of Hormuz, now effectively closed. Dubai crude hit an all-time high above $150 while WTI sits at $96 — an unprecedented $50-plus spread.

• Oil priced in yen — not dollars — is the real tail risk. With USD/JPY at 159, the yen cost of crude has surged 60% since January, compounding an energy shock with a balance-of-payments shock.

• PM Takaichi is running record fiscal stimulus (¥122.3T budget, dovish BOJ board appointments) directly into a supply-side energy war. Even former BOJ Governor Kuroda warns her plans “could stoke an inflationary upswing.”

• Phase 2 of the reverse carry trade may have started. Phase 1 was Japan selling Treasuries to prepare to defend the yen, pushing yields higher. Phase 2 is the return of Treasuries as a flight-to-safety trade as the yen strengthens and global risk assets crack.

Everyone is watching oil in dollars. The real tail risk is oil in yen.