JPY: Energy shock increases intervention threshold – MUFG

Japanese Yen Faces Pressure Amid Rising Energy Prices

According to Lee Hardman, Senior Currency Analyst at MUFG, the Japanese Yen has struggled since the onset of the Middle East conflict, with the USD/JPY exchange rate approaching its highest levels of the year. Hardman points out that the surge in energy costs has negatively impacted Japan's trade balance, prompting policymakers to be more accepting of a weaker Yen and making currency intervention less likely. Meanwhile, market participants are increasingly anticipating a potential interest rate increase by the Bank of Japan in April.

Authorities Show Greater Acceptance of Yen Depreciation

Hardman highlights that the Yen, along with the euro and Swedish krona, has been among the poorest performers in the G10 currency group since tensions escalated in the Middle East. The Yen's decline is largely attributed to Japan's deteriorating terms of trade due to elevated energy prices. This situation may lead Japanese officials to permit further Yen depreciation in the short term, even though it could intensify inflationary pressures. As a result, authorities may set a higher threshold for direct intervention, likely requiring more pronounced concerns about the speed of the Yen's decline or clear signs of speculative trading.

Market Expectations for Bank of Japan Policy Shift

The ongoing weakness of the Yen is one factor fueling speculation that the Bank of Japan could raise interest rates at its April policy meeting. A recent Bloomberg survey of Japanese economists found that 37% now anticipate a rate hike in April, a notable increase from 17% in the previous survey conducted two months earlier.

If the Bank of Japan decides against raising rates in April—especially as other global central banks adopt a more hawkish stance—the Yen may face additional downward pressure.

(This report was produced with AI assistance and subsequently reviewed by an editor.)