The Japanese yen is under renewed pressure, but this time Tokyo's options for response are more limited than before. Conflict in the Middle East is driving massive safe-haven flows into the US dollar, pushing the yen exchange rate close to the 160 level. Japanese authorities, however, face a thorny reality: the current depreciation is driven not by speculative selling but by fundamental factors, which fundamentally undermines the justification and effectiveness of foreign exchange intervention.

According to a Reuters report on Friday, Japanese policy officials have privately acknowledged that market intervention under current conditions may yield little effect—persistent dollar demand would easily offset any intervention impact.

When questioned about the possibility of intervention this week, Finance Minister Satsuki Katayama chose her words carefully, stating only that the government is prepared to act and is "monitoring the impact of exchange rate fluctuations on people's lives," deliberately avoiding previous standard phrases like "countering speculative selling." Some analysts warn that if officials remain silent, the yen could fall further towards 165.

The weak yen, combined with rising oil prices, is increasing Japan's import cost pressures and inflation risks. Consequently, market attention is rapidly shifting to the Bank of Japan. A J.P. Morgan research report released on March 12 pointed out that the BOJ is caught in a dual dilemma of war uncertainty and a weak yen, making it difficult to easily retreat from its path of monetary policy normalization.

This Time Is Different: The Logic for Intervention Has Fundamentally Changed

Japan's two previous large-scale market interventions—in 2022 and 2024—occurred against a backdrop of massive speculative selling of the yen. At that time, carry trades were prevalent, and the US-Japan interest rate differential was the main driver. The goal of intervention was to target clear speculative positions.

The nature of the current depreciation, however, is entirely different. According to US Commodity Futures Trading Commission (CFTC) data, net short yen positions in early March were approximately 16,575 contracts, far below the level of around 180,000 contracts seen during Japan's last major intervention in July 2024. The absence of significant speculative pressure substantially weakens the traditional rationale for intervention.

Shota Ryu, a foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, stated, "If Japan intervenes now, the effect won't be very good because as long as the Middle East situation remains unresolved, safe-haven dollar buying will continue." He also noted that intervention could even be counterproductive—if the yen briefly rebounds due to intervention, speculators might seize the opportunity to short it again.

On the international coordination front, Japan also faces obstacles. Under the G7 framework, the consensus on foreign exchange intervention is to target "speculative fluctuations that deviate from economic fundamentals." If this round of yen depreciation is deemed fundamentally driven, Japan would struggle to gain backing from its allies.

Reuters reported that precisely for this reason, Tokyo is currently shifting its focus towards urging the international community to coordinate on stabilizing oil prices. Katayama stated in parliament this week that Japan has "strongly urged" its G7 partners to hold a meeting to discuss measures to counter soaring oil prices. Japan has also taken the lead in releasing strategic petroleum reserves, creating momentum for a joint action led by the International Energy Agency.

Focus Shifts to the Bank of Japan: Rate Hike Window Could Be Moved Up

With the scope for FX intervention narrowing and the effectiveness of international coordination in doubt, market focus is turning to the Bank of Japan. Expectations for an interest rate hike have become the last line of defense supporting the yen.

The J.P. Morgan report noted that the likelihood of a policy adjustment at the upcoming BOJ meeting is low, as the Iran conflict provides the central bank with ample reason to "wait and see." This assessment aligns with mainstream market expectations. However, the report also emphasized that the BOJ, having already delayed policy normalization, would find it difficult to substantially abandon its hawkish stance—softening rate hike expectations while the yen remains under pressure would risk accelerating its depreciation further.

J.P. Morgan expects the BOJ to signal the following: maintaining the normalization path, assessing uncertainties related to the Iran conflict before deciding on a rate hike, and refraining from hiking rates hastily during market turmoil. This messaging would neither pre-commit to action in April nor rule out a hike later if conditions improve. The report suggests that the criteria for "stability" will, in practice, largely depend on the level of pressure on the yen at that time.

J.P. Morgan also highlighted a fundamental difference between the BOJ's situation and that of the US Federal Reserve and the European Central Bank: the latter two have policy rates near neutral levels and can afford to wait, whereas Japanese monetary policy remains highly accommodative. In a context where global inflation concerns could reignite, further delays would make the BOJ increasingly conspicuous and continue to add downward pressure on the yen. "The Bank of Japan has less time to wait than its peers."

Akira Moroga, Chief Market Strategist at Aozora Bank, stated that from a fundamental perspective, a July rate hike remains the most natural timing. "However," he added, "if yen depreciation pressures intensify, a move in April would not be surprising, even though the BOJ might not explicitly link it to the exchange rate."