Geopolitical Risk Pushes Yen Towards Intervention Threshold

Foreign-exchange markets are now on high alert for potential direct intervention, which would be the first since July 2024. Japan faces a complex triple threat: rising crude prices, a widening trade deficit, and a fundamental shift in domestic fiscal policy, exacerbating its energy-dependent economy.

SMBC Nikko Securities strategist Makoto Noji states intervention serves as a crucial strategic defense to buy time while global oil prices remain elevated, calling it Japan's only viable tool to curb inflation and yen weakness. Sony Financial Group's Juntaro Morimoto indicates dollar gains against the yen from unwinding long-yen positions are muted as speculative positions are already net-short for the yen.

NLI Research Institute senior economist Tsuyoshi Ueno expects the Middle East situation to stabilize this spring, projecting the dollar to settle around 157 yen in three months. However, Ueno warns that if the conflict persists and oil prices remain high, the yen will weaken further amid growing speculation of U.S. monetary tightening, especially after the Federal Reserve delivered a hawkish hold decision last week, and yen weakness backed by economic fundamentals will test new lows even with government intervention.