If crude oil supply continues to be disrupted, will the yen fall to 175?

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UBS believes that even if Japanese officials continue to intensify verbal interventions, if the oil price shock persists, the yen's decline may be hard to stop.

On Wednesday, April 1st, UBS strategists warned in a report that in the extreme scenario of a sharp rise in oil prices, USD/JPY could reach 175 before the end of the year. The Japanese authorities’ foreign exchange intervention measures may backfire at that time and fail to reverse the weak yen trend.

On Thursday during the Asia-Pacific session, WallstreetCN mentioned that, in the nationwide phone address, Trump did not send clear signals to cool the situation with Iran, causing the market's previous optimism for a quick resolution to the conflict to evaporate. USD/JPY rapidly recovered most of this week's losses, approaching 160 again.

Last Friday, the USD/JPY exchange rate broke above 160 for the first time in 2024, triggering intensive warnings from Japanese policy officials.

Atsushi Mimura, Head of Currency Affairs at the Japanese Ministry of Finance warned of the risks of "decisive action," Bank of Japan Governor Kazuo Ueda reiterated that exchange rate trends are a factor in monetary policy considerations, and Japanese Finance Minister Satsuki Katayama also stated they are ready to respond at any time. This multi-pronged approach shows that authorities are highly alert to further yen weakening.

Intervention May Backfire in a Stagflation Environment

The UBS strategist team led by Shahab Jalinoos pointed out that if oil prices rise to around $150 per barrel, attempts to suppress inflation through foreign exchange intervention may be counterproductive. The report stated:

This move (foreign exchange intervention) might only provide the market with a higher spot to sell yen, at the cost of consuming foreign reserves, but may not change the trajectory of the exchange rate.

UBS believes that under this scenario, authorities may turn more to fiscal measures such as energy subsidies to curb inflation, rather than relying on FX intervention.

UBS painted a more pessimistic "continuous shock" scenario in its report: If the world enters a stagflation environment, the market may conclude that Japanese policymakers have no intention to stop the yen from continuing to depreciate.

Driven by this belief, the shock from worsening trade conditions will drive USD/JPY significantly higher, with a year-end target of 175.

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