MUFG’s Senior Currency Analyst Lloyd Chan highlights that the Japanese Yen (JPY) may weaken further as the energy shock from Middle East tensions persists and markets delay expectations for a Bank of Japan (BoJ) rate hike to June. However, the risk of BoJ intervention rises as Yen depreciation amplifies imported, oil-driven inflation, potentially limiting the extent of further downside in the currency.

Weakness tempered by intervention risk

"Meanwhile, Brent prices closed above $100/bbl for the first time in the past 7 trading days, following a geopolitical standoff between US-Iran in the Middle East. While President Trump has unilaterally extended the ceasefire indefinitely, the continued blockade of Iranian ports and Iran’s rejection of peace talks point to a prolonged disruption to energy flows through the Strait of Hormuz."

"With no quick resolution in sight, risks of more persistent, oil‑driven inflation have risen. That said, the ceasefire extension suggests limited appetite for further escalation for now, offering some marginal support to broader risk sentiment."

"Against this backdrop, markets have maintained their net long positioning on the dollar, while the yen could face further weakness in the near term as the energy shock persists and markets push back expectations of BoJ rate hike to June at the earliest."

"That said, deeper yen depreciation may increasingly run up against BoJ intervention risks, particularly as yen weakness would exacerbate oil‑driven inflation pass‑through."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)