“Who knows better about surprise than Japan?” Donald Trump joked, while hosting his “friend” Sanae Takaichi at the White House late in March. “Why didn’t you tell me about Pearl Harbor, OK?”

I laughed. Just another example of Trump’s complete indifference to decorum. No one else found the quip amusing, though.

(I’ve said it again and again: If you can’t find humor in the darkly absurd, life’s even tougher than it would be on its own.)

Trump was responding to a question from a Japanese reporter who wondered why the White House didn’t bother to give America’s closest allies, like Japan, a heads up before launching the war against Iran.

The conflict’s an issue for Takaichi domestically: Japan relies almost exclusively on imports for its oil, and the vast majority of the country’s imported crude comes from the Mideast.

Surging energy prices can exert upward pressure on dollar-yen, exacerbating FX pass-through inflation and chancing a terms of trade shock. We saw this in 2022 when Japan’s import bill spiraled due in no small part to the juxtaposition between soaring commodity costs and the ever-weaker currency.

All else equal, the more dependent you are on imported energy, the more cruelly efficient the transmission mechanism between oil prices, the currency and your trade balance. At some point, the benefit to exporters from the falling yen is outweighed by the drag on households’ purchasing power.

The market knows that, and will reflect it. From the day Ali Khamenei was assassinated through late April, the yen weakened ~3% against the dollar, pushing USDJPY to the brink of 160.

160’s a line in the sand and Japan defended it this week with the first FX intervention since 2024.

The figure above shows you the correlation between crude and USDJPY. It was the highest in four years just before Satsuki Katayama and Atsushi Mimura stepped in Thursday, ordering the BoJ to sell dollars for yen and triggering a sharp reversal in the pair.

Remember: Takaichi needs to address consumers’ cost-of-living concerns if she hopes to sustain the sky-high approval ratings which informed her decision to call a successful snap vote earlier this year. Soaring oil prices and accompanying pressure on the yen don’t help.

Neither, I’d be remiss not to note, does Takaichi’s own preference for reflationary policy, which she shares with her legendary mentor, the late Shinzo Abe. Takaichi put a pair of committed reflationists on the BoJ’s board.

Although the bank’s still in hawk mode (three officials voted to hike at this week’s policy meeting) and determined to persist in the glacial process that is normalizing Japanese monetary policy, real rates in Japan are still deeply negative. Rate diffs still favor the dollar by a wide margin.

Between the persistence of relatively elevated US rates, very high oil prices and a government in Japan that doesn’t appear fully cognizant of the irony inherent in addressing the public’s cost-of-living concerns with expansionary policies carrying negative implications for the currency, the yen’s got issues.

If the currency’s going to firm on a sustained basis, it needs lower oil, a coordinated intervention with the US, a decisive dovish turn from the Fed under Kevin Warsh or something more creative, like the Japanese government putting on a huge short in oil futures.