Yen approaches 160 again: Safe-haven funds pour into the dollar, and Japan’s room for intervention is disappearing?

The yen is once again under pressure, but this time Tokyo has fewer options than before. The Middle East conflict has driven large-scale safe-haven flows into the dollar, pushing the yen exchange rate near the 160 mark. Japanese authorities face a tricky reality: the driving force behind this round of depreciation is not speculative selling, but fundamental factors, which fundamentally weakens the legitimacy and effectiveness of foreign exchange intervention.

According to a Reuters report on Friday, Japanese policymakers privately admit that intervention in the current environment may have little effect—persistent demand for dollars will easily offset any intervention.

Finance Minister Satsuki Katayama was cautious when asked about the possibility of intervention this week, stating only that the government is ready to act at any time and is "monitoring the impact of exchange rate fluctuations on people’s livelihoods," deliberately avoiding the usual phrases such as "combating speculative selling." Some analysts warn that if officials continue to remain silent, the yen could further depreciate to 165.

Yen weakness coupled with rising oil prices is intensifying Japan’s import cost pressures and inflation risks, with the market's attention quickly turning to the Bank of Japan. JPMorgan's research report issued on March 12 noted the BOJ is caught between war-related uncertainty and yen weakness, making it difficult to easily retreat from the path toward monetary policy normalization.

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

The last two major interventions by Japan—2022 and 2024—both occurred against a backdrop of large-scale speculative selling of the yen. Carry trades prevailed, the USD/JPY interest rate spread was the main driver, and interventions aimed to counter clear speculative positions.

However, the nature of this round of depreciation is completely different. According to data from the US Commodity Futures Trading Commission (CFTC), in early March, net short yen positions stood at about 16,575 contracts, much lower than the roughly 180,000 contracts during Japan’s last major intervention in July 2024. The absence of speculative pressure has greatly weakened the traditional rationale for intervention.

Shota Ryu, FX strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "If Japan intervenes now, the effect won’t be great, because as long as the Middle East situation is unresolved, safe-haven dollar buying will persist." He also pointed out that intervention may even be counterproductive—once the yen briefly rebounds due to intervention, speculators may take the opportunity to short it again.

On the international coordination front, Japan also faces obstacles. Within the G7 framework, consensus on FX intervention is to counter “speculative volatility that deviates from economic fundamentals,” and if this round of yen depreciation is deemed to be fundamentally driven, Japan will find it difficult to gain allied support.

Reuters reported that for this reason, Tokyo is now focused on promoting international coordination to stabilize oil prices—Katayama said in parliament this week that Japan has "strongly urged" G7 partners to convene meetings to discuss measures against surging oil prices, and Japan has taken the lead in releasing strategic oil reserves, creating momentum for a joint action led by the International Energy Agency.

Focus Shifts to the BOJ: Rate Hike Window Could Move Forward

With less room for FX intervention and uncertainty about international coordination, the market’s focus shifts to the Bank of Japan, with rate hike expectations becoming the final line of defense supporting the yen.

JPMorgan’s research report suggests the likelihood of policy adjustment at this BOJ meeting is low; the Iran war provides ample "reason to wait and see," which aligns with mainstream market expectations. However, the report also emphasizes that having already delayed policy normalization, the BOJ will find it hard to abandon its hawkish stance—if it softens its rate hike outlook while the yen remains under pressure, it risks accelerating depreciation further.

JPMorgan expects the BOJ to signal the following: maintain the normalization path, assess Iran-war-related uncertainty before deciding on a rate hike, and avoid rash moves during market turmoil. This statement neither pre-commits to action in April nor rules out rate hikes if conditions improve. The report believes the “stability” benchmark will largely depend on the degree of pressure on the yen at that time.

JPMorgan also points out a fundamental difference between the BOJ and the Federal Reserve and European Central Bank: the latter two have policy rates near neutral and can afford to wait; the BOJ’s monetary policy remains highly accommodative, and as global inflation concerns may reignite, further delays will make the BOJ stand out and add persistent downward pressure to the yen. "The BOJ has less time to wait than its peers."

Akira Moroga, chief market strategist at Aozora Bank, said the July rate hike remains the most natural timing from a fundamentals standpoint, "but if pressure on the yen intensifies, moving ahead to April would not be surprising, although the BOJ may not explicitly link this to the exchange rate."

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