The signal at the 160 warning line has failed? The Japanese government's threshold for intervention in the currency market is being reshaped by the flames of war.

Despite the ongoing geopolitical conflict in the Middle East pushing the Japanese yen exchange rate (USD/JPY) back to the crucial psychological level of 1 USD to 160 JPY, the highest since July 2024 and an important trigger threshold for Japanese fiscal authorities to intervene in the yen exchange rate. However, with rising oil prices putting immense pressure on Japan's inflation and economic growth prospects heavily reliant on Middle East oil, and with global safe-haven buying driving the USD significantly higher amidst the Middle East conflict, the scope for intervention by the Japanese Ministry of Finance in the forex market is likely far less than in the past. In the current foreign exchange market amidst the US/Israel and Iran conflict in the Middle East, the old playbook of defending the yen seems to be failing, not because the Japanese government is unwilling to save the yen, but because intervention measures are currently ineffective in saving the yen. The current USD rally is more based on fundamentals and safe-haven logic, making the prospect of unilateral intervention by the Japanese Ministry of Finance significantly lower. Some veteran analysts in the forex market have warned that if core Japanese officials are not willing to verbally support the yen in the near future, it could further devalue the yen to 1 USD to 165 JPY, especially at a time of significant increases in oil prices due to the Iran war, which will inevitably raise import costs and broader inflationary pressures. In July 2024, the USD to JPY rate reached a high of 161.956, setting a record high in nearly 38 years, after which the Japanese Ministry of Finance intervened with approximately 5.5 trillion JPY. In contrast to the rapid interventions in the forex market in 2022 and 2024 - aimed at addressing continuous yen selling caused by speculators utilizing the widening interest rate differentials between the US and Japan for carry trades, the effects of the interventions were relatively positive in boosting the exchange rate. Currently, the yen exchange rate has broken through the key level of 159 mainly due to market demand for the USD as a safe haven, and concerns that the soaring oil prices will damage Japan's fragile economic recovery process. Statistics show that over 90% of Japan's energy resources such as oil and natural gas come from the Middle East oil-producing regions surrounding the Hormuz Strait, conflict in the Middle East and soaring oil prices will undoubtedly directly impact Japan's trade conditions, business costs, and consumer purchasing power, thus threatening Japan's economic recovery process. Since the outbreak of the Iran conflict, Tokyo's Nikkei 225 index has fallen significantly by 7.5%, faring much worse than the S&P 500 index, which only dropped by 2% during the same period. From a macro and forex trading perspective, the Japanese government is more likely to focus on two main strategies: first, stabilizing international oil prices in collaboration with the G7/IEA, and second, redirecting exchange rate pressure to the Bank of Japan. Japan has strongly urged the G7 to discuss measures to address the surge in oil prices and participate in coordinated actions for strategic oil reserves; if external stabilization tools fail to stop the continued weakening of the yen, market attention will shift from "Will the Ministry of Finance intervene in the yen?" to "Will the Bank of Japan restart rate hikes earlier and on a larger scale?" Senior officials at the Japanese Ministry of Finance will also signal support for rate hikes. The current situation facing the Japanese government is drastically different, with policymakers privately indicating that intervening to support the yen may be futile now due to the continuation of the Middle East conflict, which could weaken such actions amid the surging demand for USD. "Everything depends on how this war develops and how long the shipping routes in the Hormuz Strait will be blocked," a senior official stated. "It's about the narrative of buying USD, not selling JPY." Overall, when interventions in the forex market aim to unwind large speculative positions, the effects are most prominent; this was the case when Tokyo intervened to support the yen exchange rate in 2022 and 2024. Currently, there is much less evidence of such speculative pressure accumulating in the forex market. According to statistics from the US Commodity Futures Trading Commission (CFTC), as of early March, the net short yen positions totaled about 16,575 contracts. This is significantly lower than the level of approximately 180,000 contracts in July 2024 when Japan last implemented large-scale buying of the yen for intervention purposes. Despite the Japanese fiscal authorities strengthening their warning rhetoric as the yen approaches the significant psychological level of 160, they are avoiding directly mentioning speculative yen selling as they typically would to justify intervention in the forex market. When asked about the possibility of intervention in the forex market on Friday, Japanese Finance Minister Kaori Mishima did not give a direct answer, only stating that the government is prepared to take action at any time and "will fully recognize the impact of exchange rate fluctuations on people's lives," Mishima said. Shota Ryu, a forex strategist at Mitsubishi UFJ Morgan Stanley Securities, stated, "Even if Japan intervenes now, the effect may not be that good, as long as the situation in the Middle East is not calm, the strong momentum of buying USD as a safe haven is likely to continue." He added, "Intervention may even bring a risk: once the yen rebounds, it may encourage speculators to sell yen again." The basis for Japan's defense of intervention is a consensus among the Group of Seven (G7) developed economies that authorities can act to counter excessive volatility caused by speculative activities that deviate from economic fundamentals. If the recent yen decline is being driven by fundamental factors, Japan cannot rely on G7 member countries to support its unilateral intervention. This has led Tokyo to focus on participating in international coordination to stabilize oil prices, as oil prices are seen as the root cause of broader market fluctuations. Mishima stated in parliament this week that Japan has "strongly urged" other G7 members to convene and discuss measures to address the surge in oil prices. Japan was also the first among major developed countries to announce the release of a portion of its strategic oil reserves, creating momentum for actions led by the International Energy Agency (IEA), with IEA member countries subsequently agreeing to release a record 400 million barrels of emergency strategic oil reserves. Market focus has shifted back to the policy path of the Bank of Japan 160 itself may not necessarily be an automatic trigger threshold, as what is more likely to trigger intervention is the "uncontrolled speed" and "disorderly volatility." Japanese officials now repeatedly emphasize the impact of exchange rate fluctuations on people's lives rather than defending a specific integer threshold; analysts from Mitsubishi UFJ Morgan Stanley also bluntly stated that the effect of intervention at this moment will not be good while the Middle East situation remains volatile and safe-haven USD buying pressure persists, intervention now may even provide speculators with an opportunity to sell yen again after a brief yen rebound. In other words, the concern of the Japanese Ministry of Finance now is not the exchange rate pressure of breaching the "160 key level" but the credibility risk of not being able to control it after intervening. Therefore, in the short term, it is not ruled out that the Japanese government "will ramp up the intensity of verbal intervention", but actually intervening again is highly likely if USD/JPY shows a faster, more disorderly, and unmoored upward push; otherwise, rather than single-handedly entering the market to hold USD, Japan is more likely to wait for oil prices to ease or stabilize the yen relying on a more hawkish monetary policy path or expectations of rate hikes by the Bank of Japan. Some forex market analysts suggest that if international coordination or verbal intervention fails to stem the yen's decline, Japan may have no choice but to adjust its monetary policy through rate hikes and release a hawkish monetary policy path to narrow the interest rate differential with the US, seen as a key factor behind the sustained depreciation of the yen. Akira Moroga, Chief Market Strategist at Seiryu Bank, stated, "From a fundamental perspective, July still looks like the most natural timing for the Bank of Japan to hike rates." "But if the pressure of yen depreciation continues to intensify, due to concerns about yen devaluation significantly raising prices, even though Bank of Japan officials may not openly say it, advancing monetary policy action to April wouldn't be surprising," the strategist said.