The Japanese yen's exchange rate (USD/JPY benchmark) is being pushed back toward the critical psychological level of 160 yen per U.S. dollar, a high point last seen in July 2024, largely due to renewed geopolitical conflict in the Middle East. This level was previously considered a trigger threshold for intervention by Japanese fiscal authorities. However, rising crude oil prices are exerting significant pressure on Japan's inflation and economic growth outlook, given the nation's heavy reliance on Middle Eastern oil. Amid the Middle East conflict, global safe-haven flows continue to pour into the U.S. dollar, substantially boosting its value. Consequently, the Japanese Ministry of Finance's room for intervention in the foreign exchange market is now considerably more limited than in the past.

In the current foreign exchange market, shaped by conflict between the U.S./Israel and Iran in the Middle East, the old playbook for defending the yen appears to be losing effectiveness. The challenge for the Japanese government is not an unwillingness to support the currency, but the diminished likelihood that intervention would successfully rescue the yen. The current phase of U.S. dollar strength is driven more by fundamental factors and safe-haven logic, significantly reducing the odds of success for unilateral intervention by the Japanese Ministry of Finance.

Some veteran foreign exchange market analysts warn that if core Japanese officials are reluctant to support the yen through verbal statements in the near term, the yen could depreciate further, potentially to 165 yen per dollar. Such a move would inevitably increase import costs and broader inflationary pressures, especially as conflict involving Iran has substantially driven up oil prices.

Back in July 2024, the USD/JPY pair reached a high of 161.956, setting a nearly 38-year peak. Shortly thereafter, the Japanese Ministry of Finance intervened using approximately 5.5 trillion yen. This situation differed from interventions in 2022 and 2024, when Tokyo acted swiftly primarily to counter sustained yen selling driven by speculators exploiting the widening interest rate differential between the U.S. and Japan. The intervention's effect on boosting the exchange rate was relatively positive at that time.

The recent breach of the key 159 level for the yen is attributed more to robust safe-haven demand for the U.S. dollar and market concerns that soaring oil prices could damage Japan's fragile economic recovery. Statistics indicate that over 90% of Japan's energy resources, such as oil and natural gas, originate from oil-producing regions in the Middle East near the Strait of Hormuz. Conflict in the Middle East and surging oil prices would undoubtedly deal a direct and significant blow to Japan's terms of trade, corporate costs, and consumers' real purchasing power, thereby threatening the economic recovery process.

Since the outbreak of conflict involving Iran, the Nikkei 225 index in Tokyo has fallen sharply by 7.5%, significantly underperforming the S&P 500 index, which declined by only 2% over the same period. From a macroeconomic and foreign exchange trading perspective, the Japanese government is more likely to focus its policy efforts on two fronts initially: first, collaborating with the G7 and International Energy Agency (IEA) to stabilize international oil price trends, and second, shifting exchange rate pressure back onto the Bank of Japan.

Japan has strongly urged the G7 to discuss responses to soaring oil prices and is participating in coordinated strategic petroleum reserve releases. If external stabilization tools fail to halt the yen's continued weakening, market focus will likely shift from "will the Ministry of Finance intervene?" to "will the Bank of Japan restart interest rate hikes earlier and more aggressively?" Senior officials from the Japanese Ministry of Finance are also expected to voice support for central bank rate hikes.

The circumstances facing the Japanese government this time are fundamentally different. Some policymakers privately indicate that intervening to support the yen now might be futile, primarily because if the Middle East conflict persists, such actions could be overwhelmed by strong waves of U.S. dollar demand, which would only intensify further. "Everything depends on how this war develops and how long the shipping routes through the Strait of Hormuz remain blocked," a senior official stated. "The narrative is about buying U.S. dollars, not about selling yen."

Overall, foreign exchange intervention is most effective when aimed at unwinding large speculative positions, as was the case when Tokyo intervened to support the yen in 2022 and 2024. Currently, signs of such speculative pressure building up in the market are much fewer. According to statistics from the U.S. Commodity Futures Trading Commission (CFTC), the net short yen position in early March totaled approximately 16,575 contracts. This is far smaller than the level of around 180,000 contracts in July 2024, which coincided with Japan's last large-scale yen-buying intervention.

Although Japanese fiscal authorities have intensified their warning rhetoric as the yen approaches the psychologically significant 160 level, they have avoided directly referencing speculative yen selling—a standard textbook justification for intervention. On Friday, when asked about the possibility of intervention, Japanese Finance Minister Shunichi Suzuki did not provide a direct answer, stating only that the government is prepared to act at any time and is "fully aware of the impact exchange rate fluctuations can have on people's lives."

Shota Ryu, a foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, commented, "If Japan intervenes now, the effect won't be very good because, as long as the Middle East situation remains unresolved, strong safe-haven buying of the dollar can easily persist." He added, "Intervention could even carry the risk that any rebound in the yen might encourage speculators to sell the yen again."

Japan's justification for intervention rests on a consensus among G7 advanced economies that authorities can act against excessive volatility caused by speculation and deviating from economic fundamentals. If the recent yen depreciation is driven by fundamental factors, Japan cannot expect support from other G7 members for unilateral intervention. This also leads Tokyo to focus on participating in international coordination to stabilize oil prices, which are seen as the root cause of broader market volatility.

Finance Minister Suzuki stated in parliament this week that Japan has "strongly urged" other G7 members to convene a meeting to discuss measures against soaring oil prices. Japan was also the first among major developed nations to announce the release of part of its strategic petroleum reserves, creating momentum for an IEA-led action, after which IEA member countries agreed to release a record 400 million barrels of emergency strategic reserves.

Market attention is shifting back to the Bank of Japan's policy path. The 160 level itself may no longer be an automatic trigger; what is more likely to prompt intervention is "uncontrolled speed" and "disorderly volatility." Japanese officials now repeatedly emphasize the impact of exchange rate fluctuations on people's livelihoods rather than rigidly defending a specific integer level. Strategists at Mitsubishi UFJ Morgan Stanley also state plainly that if the Middle East situation remains unresolved and safe-haven dollar buying continues, intervention at this moment would not be very effective and might even provide speculators an opportunity to resume shorting the yen after any brief rebound.

In other words, the Japanese Ministry of Finance's current concern is not the "exchange rate pressure from breaching the key 160 level," but the "risk to the Japanese government's credibility if intervention fails to suppress the move." Therefore, in the short term, markets do not rule out the possibility that the Japanese government will "maximize the intensity of verbal intervention." However, actual market intervention will likely require a prerequisite: a faster, more chaotic, and unanchored surge in USD/JPY. Otherwise, rather than entering the market alone to resist the dollar's strength, Japan is more likely to prioritize waiting for oil prices to ease or relying on a more hawkish monetary policy path from the Bank of Japan, including heightened expectations for interest rate hikes, to stabilize the yen.

Some foreign exchange market analysts suggest that if international coordination or verbal intervention still fails to curb the yen's decline, Japan might have no choice but to narrow the interest rate differential with the United States—a key factor behind the yen's persistent depreciation—through rate hikes and signaling a hawkish monetary policy path.

Akira Moroga, Chief Market Strategist at Aozora Bank, said, "Personally, from a fundamental perspective, a July rate hike still looks like the most natural timing for the Bank of Japan." "But if downward pressure on the yen intensifies, driven by concerns that yen depreciation is significantly pushing up prices, it wouldn't be surprising if monetary policy action were brought forward to April, even if Bank of Japan officials might not publicly state it," the strategist added.