The Japanese yen rose in Asian trading on Friday against a basket of major and minor currencies, extending its recovery from a five-week low against the US dollar. Despite the rebound, the Japanese currency remains on track to post another weekly loss, weighed down by escalating geopolitical tensions in the Middle East.

Data released in Tokyo showed stronger-than-expected wage growth in Japan, adding to inflationary pressures on policymakers at the Bank of Japan and strengthening expectations of an interest rate hike later this month.

Price Overview

• USD/JPY today: The dollar fell by around 0.1% against the yen to ¥159.90, from an opening level of ¥160.01, after reaching an intraday high of ¥160.02.

• The yen closed Thursday up about 0.1% against the dollar, recording its first daily gain in four sessions as part of a recovery from a five-week low of ¥160.09.

Weekly Performance

So far this week, which officially concludes with Friday’s settlement, the yen is down approximately 0.5% against the US dollar and is on course for its fourth consecutive weekly decline.

The losses have been driven by renewed military tensions in the Gulf region, which have reduced optimism about the success of peace negotiations between the United States and Iran.

Japanese Wages

Japan’s Ministry of Labor reported on Friday that total monthly cash earnings, along with a separate measure of full-time wages, increased 3.5% year-over-year in April, exceeding expectations of a 3.2% rise. Wage growth had previously reached 3.1% in March.

Stronger wage growth is widely viewed as paving the way for further price increases and faster inflation in the months ahead, increasing pressure on Bank of Japan policymakers and reinforcing expectations of a rate hike in June.

Japanese Interest Rates

• Bank of Japan Governor Kazuo Ueda said on Wednesday that the central bank needs to continue raising interest rates in response to economic and inflation developments.

• Ueda added that upside risks to prices appear greater than downside risks and could materialize faster than previously anticipated.

• Following the wage data and Ueda’s comments, market pricing for a 25-basis-point rate hike at the June meeting rose from 65% to 85%.

• The Bank of Japan is scheduled to meet on June 15–16 to assess the appropriate monetary policy stance for the world’s fourth-largest economy.

The ¥160 Threshold

Japanese authorities continue to closely monitor currency movements, particularly as the yen hovers around the critical ¥160-per-dollar level, which markets view as a potential trigger for official intervention.

According to Reuters sources, Tokyo intervened several times in late April and early May to support the currency, although the resulting strength proved short-lived. At that time, the exchange rate weakened to ¥159.25 per dollar, its lowest level since April 30.

Japanese officials have repeatedly warned against excessive currency volatility and indicated that decisive action could be taken against disorderly market moves.

Finance Minister Satsuki Katayama reiterated that the government is “prepared to take appropriate action” if currency markets experience excessive or speculative movements.

US Dollar

The US Dollar Index fell about 0.1% on Friday, extending losses for a second consecutive session and moving further away from its two-month high, reflecting continued weakness in the US currency against a basket of global peers.

The dollar has come under pressure as risk appetite improves modestly and investors maintain hopes that the United States and Iran are nearing a peace agreement that could bring an end to the three-month conflict.

Latest Developments in the Iran Conflict

• Hezbollah’s leader rejected the proposed ceasefire agreement in Lebanon.

• The rejection has cast a shadow over Middle East stability and prospects for ending the Iran conflict.

• The Lebanon ceasefire remains linked to broader negotiations between the United States and Iran.

• US President Donald Trump said talks with Iran are progressing well and hinted that meaningful developments could emerge by the end of this week.

• Trump also stated that he could meet Iran’s Supreme Leader “if an agreement is reached.”

Most cryptocurrencies declined during Thursday trading despite signs of easing tensions in the Middle East, with Ethereum extending its losses and falling below the key psychological level of $1,800.

As of 21:08 GMT, Ethereum was down 1.5% on CoinMarketCap, trading at $1,771.

Iran conflict remains a key focus

Israel and Lebanon announced late Wednesday that they had agreed to implement a ceasefire, raising hopes for a broader agreement between Washington and Tehran. Iran had previously linked any potential deal, at least in part, to an end to the fighting between Israel and the Iran-backed Hezbollah movement in Lebanon.

John Evans, analyst at PVM Oil Associates, said Iran continues to insist on ending what it describes as Israeli aggression against Hezbollah in Lebanon, adding that there are already signs of a potential breakthrough.

Lebanese President Joseph Aoun said on Thursday that the ceasefire would take effect within 24 hours once all parties involved approve it.

US President Donald Trump also suggested on Wednesday that progress in negotiations with Iran could be achieved as soon as this weekend.

Iranian Foreign Minister Abbas Araghchi stated on Wednesday that communication channels between Tehran and Washington remain open, although he acknowledged that no meaningful progress has yet been made, adding that both sides are still reviewing the exchanged draft proposals.

Meanwhile, the Republican-controlled US House of Representatives approved a resolution on Wednesday aimed at preventing Trump from continuing the war against Iran. For the measure to take effect, it must still pass the Senate and secure a two-thirds majority in both chambers to override an expected presidential veto.

Economic data

On the economic front, a survey released on Wednesday showed that the prices-paid component of the US services sector rose to its highest level in nearly four years last month, reinforcing expectations among economists that the Federal Reserve will keep interest rates unchanged through next year.

Corn and soybean prices on the Chicago Board of Trade fell again on Thursday, hitting multi-month lows as favorable weather conditions across US growing regions continued to fuel selling pressure, according to market analysts.

Wheat also edged lower as improved rainfall across the US Plains and the start of the harvest season added to supply-side pressure.

The most-active CBOT corn contract fell 1.1% to $4.26¾ per bushel by 10:57 GMT, after touching its lowest level since February 20 for the second consecutive session.

Soybeans declined 0.6% to $11.47½ per bushel after reaching their weakest level since April 8, while wheat slipped 0.1% to $5.86½ per bushel after hitting its lowest level since April 14. All three contracts were on track for a fifth consecutive daily decline.

Andrey Sizov, head of agricultural consultancy SovEcon, said that broadly favorable expectations for US corn and soybean crops have encouraged investment funds to increase selling activity after building massive long positions in major crops earlier this year, positions that had approached record levels.

Sizov added that “Chinese silence” regarding purchases of US crops is also weighing on prices from the demand side.

Washington previously announced that Beijing had pledged during a mid-May summit to purchase $17 billion worth of US agricultural products annually, in addition to an earlier commitment to import soybeans. China confirmed that it had agreed to expand agricultural trade but provided no additional details.

Market participants are awaiting the US Department of Agriculture’s weekly export sales report on Thursday for fresh indications of demand trends.

Investors are also monitoring the discovery of a new case of New World screwworm infestation—a flesh-eating parasite—in a calf in Texas. The development could have implications for the US cattle herd and, consequently, feed demand.

Meanwhile, lower oil prices on Thursday, following the Israel-Lebanon ceasefire agreement and renewed hopes for a broader Middle East peace deal, removed one source of support for crops such as corn and soybean oil that are used in biofuel production.

However, grain markets have become less sensitive to energy price fluctuations in recent weeks, as seasonal crop-supply factors have once again become the dominant market driver.

In the wheat market, attention remained focused on abundant global supplies, as the US winter wheat harvest gets underway and production expectations continue to improve in Russia, the world's largest wheat exporter.

In what appears to be a somewhat puzzling development for energy markets, oil prices have yet to surge to record highs despite what many consider the most severe supply disruption in the history of the market.

This is largely because traders continue to bet on a relatively quick resolution to the Strait of Hormuz crisis, even though it has now persisted for more than three months. Global inventories have also provided a temporary buffer against the shock, while China, the world's largest crude importer, has largely stepped away from the spot market. Most importantly, demand destruction is accelerating as high prices force consumers to cut consumption.

Beyond the current supply disruptions and conflicting signals surrounding the Middle East conflict, analysts are increasingly focused on how much demand could be lost permanently even after the crisis ends.

Inventories are cushioning the shock—for now

The global oil market entered the Iran conflict with a supply surplus, helping limit upward pressure on prices despite the war entering its fourth month. However, global inventories outside China are being depleted at a record pace, suggesting that the market’s safety cushion is rapidly shrinking and that the full impact of lost supplies may soon become visible.

According to data from Kpler, China alone accumulated more than 1.2 billion barrels of strategic and commercial inventories over the past year, while the rest of the world has experienced accelerating inventory drawdowns.

In early May, global stockpiles were being drawn down at a rate of roughly 1.5 million barrels per day. That pace has now increased to nearly 1.7 million barrels per day, pointing to growing supply tightness.

As inventories decline and oil prices rise above $100 per barrel, consumers have begun reducing demand. Across Asia, governments and consumers have responded to higher fuel costs by implementing measures such as shorter workweeks and expanded work-from-home arrangements for public-sector employees.

The trend is not limited to Asia. Consumers in Europe and the United States have also begun cutting fuel consumption and reducing air travel as gasoline prices and airline fares climb.

In the United States, cumulative gasoline costs paid by consumers since the start of the US campaign against Iran on March 1 have risen by roughly $40 billion, according to Patrick De Haan, Head of Petroleum Analysis at GasBuddy. He added that Americans have been paying between $400 million and $600 million more per day for gasoline over the past three months.

De Haan also noted that the US Strategic Petroleum Reserve is less than ten days away from falling to its lowest level since August 1983, a level not seen since the reserve began being filled in 1977.

Demand destruction gains momentum

As costs rise, consumers are rethinking their fuel spending habits. Normally, declining inventories would lead to much sharper increases in oil prices.

However, the scale of demand destruction has so far been large enough to offset part of the supply shock, especially when combined with China's absence from the spot market after building inventories sufficient for several additional months.

In China alone, oil demand has unexpectedly fallen by about 9%, equivalent to roughly 1.5 million barrels per day, according to JPMorgan analysts Natasha Kaneva, Lyuba Savinova, and Artem Vakhritin.

The analysts described the shift as a “quiet economic decision,” noting that many Chinese consumers have transitioned to electric transportation.

Similar changes are beginning to emerge elsewhere. Sales of electric vehicles continue to grow strongly across Asia and Europe, while US consumers, despite the absence of major federal incentives, are increasingly reconsidering private vehicle use and turning more frequently to public transportation and remote work as gasoline prices reach four-year highs.

Will demand return after the crisis?

The key question for analysts and the oil market over the medium and long term is whether demand will return to previous levels once the crisis ends, or whether governments and policymakers will permanently replace part of their oil and gas consumption with lower-carbon alternatives such as electric vehicles, solar power, and wind energy in order to reduce exposure to future geopolitical energy shocks.

JPMorgan analysts asked a fundamental question: “Can the world really function while consuming roughly 9% less oil?”

For now, the options remain limited. With the Strait of Hormuz still closed, inventories continue to fall toward critical levels, while consumers seek alternatives through electric vehicles or simply by driving and traveling less.

The longer the Hormuz crisis persists, the greater the supply disruption becomes, increasing pressure on governments to adopt long-term measures aimed at reducing dependence on Middle Eastern oil and gas.

As a result, part of the demand destruction that began as a temporary response to the crisis could ultimately become permanent.

At present, demand destruction is helping to restrain oil prices.

Commodity analysts at Goldman Sachs said that reduced consumption caused by higher prices is partially offsetting the impact of the actual supply shortage.

However, the inventory cushion that has supported the market is approaching exhaustion. Even China has begun drawing down its reserves, and with crude purchases expected to recover in the coming months, oil prices could experience a significant rally this summer, accompanied by the emergence of genuine supply shortages.