If Oil Supply Disruptions Persist, Will the Yen Fall to 175?

UBS believes that even with continuous verbal intervention from Japanese officials, the yen's depreciation may be difficult to stop if the oil price shock persists. On Wednesday, April 1st, UBS strategists warned in a report that in an extreme scenario of sharply rising oil prices, USD/JPY could climb to 175 by year-end. Japanese authorities' foreign exchange intervention measures might prove counterproductive, failing to reverse the yen's weakening trend. During Thursday's Asia-Pacific trading session, Wallstreetcn.com reported that Trump's nationwide address did not "send a clear signal of de-escalation" regarding the situation with Iran, quickly dashing earlier market optimism for a swift resolution. USD/JPY rapidly recovered most of its weekly losses, once again approaching the 160 level. Last Friday, USD/JPY broke above the 160 mark for the first time in 2024, triggering a flurry of warnings from Japanese policymakers. Atsushi Mimura, the top currency official at Japan's Ministry of Finance, cautioned about the risk of "decisive action." Bank of Japan Governor Kazuo Ueda reiterated that exchange rate movements are a factor in monetary policy considerations. Japan's Minister of Finance, Sanae Takaichi, also stated readiness to respond. This multi-pronged approach indicates the authorities' high vigilance against further yen depreciation. Intervention May Backfire in a Stagflationary Environment The UBS strategy team led by Shahab Jalinoos pointed out that if oil prices rise to around $150 per barrel, using foreign exchange intervention to suppress inflation could be counterproductive. The report stated: Such a move (foreign exchange intervention) could merely provide the market with a higher level to sell the yen, at the cost of depleting foreign exchange reserves, without necessarily altering the trajectory of the exchange rate. UBS believes that in this scenario, authorities would likely shift their anti-inflationary tools towards fiscal measures, such as energy subsidies, rather than relying on foreign exchange intervention. In its report, UBS outlined a more pessimistic "persistent shock" scenario: If the global economy enters a stagflationary environment, the market might conclude that Japanese policymakers are unwilling to prevent the continued depreciation of the yen. Driven by this assessment, the shock from deteriorating terms of trade would significantly push up USD/JPY, with a year-end target of 175.