Japanese authorities have once again sounded the alarm for intervention! The yen hovers around the 160 warning line, and Japanese bond yields are approaching multi-decade highs.

As tensions in the Middle East continue to put pressure on the yen, Japanese authorities have issued a new warning to speculators. Atsushi Mimura, Japan's top foreign exchange official, stated that the government will take all possible measures to deal with the volatility in the foreign exchange market when necessary. Mimura said on Monday, "Some market participants have indicated that speculative fluctuations in oil futures are affecting the foreign exchange market. Considering the impact of exchange rate fluctuations on the economy and people's daily lives, the government will take all necessary measures at any time." The escalation of the Middle East conflict and the rise in oil prices have pushed up U.S. long-term bond yields, supporting a stronger dollar. Following Mimura's speech, the yen to dollar exchange rate briefly rose to 159.02 yen to 1 dollar, but later fell back. At the time of writing, the dollar to yen exchange rate had risen by 0.17% to 159.50. As concerns about the escalation of the Middle East conflict leading to higher inflation intensify, Japanese government bonds fell on Monday, pushing yields closer to multi-year highs. Data shows that Japan's 10-year bond yield rose by 6 basis points to 2.32%, close to its highest level since 1999; the 5-year Japanese government bond yield rose by 5 basis points to 1.72%, nearing its highest level since its introduction. Japanese government bonds followed the downward trend of U.S. government bonds. After falling for the third consecutive week, U.S. bond yields rose to multi-month highs the 2-year bond yield rose by 18 basis points to 3.90% last week; the benchmark 10-year U.S. bond yield surged by 13 basis points to 4.38%, the highest level since the end of July last year. The conflict in the Middle East has entered its fourth week with no sign of easing. U.S. President Trump issued a 48-hour ultimatum to Iran last Saturday, demanding the reopening of the Strait of Hormuz, or else face strikes on its power plants. Iran responded that any such attacks would lead to an indefinite closure of the waterway and strikes on U.S. and Israeli energy infrastructure in the region, indicating the risks of both sides escalating the conflict. The yen briefly strengthened to 157.51 yen to 1 dollar last week, moving away from the level at which Japanese authorities were expected to intervene. The Bank of Japan maintained interest rates last Thursday, with Governor Haruhiko Kuroda taking a cautious hawkish stance at a press conference after the meeting, leaving open the possibility of a rate hike in April, thus supporting the yen. Kuroda stated that despite staying vigilant due to market volatility and deteriorating risk sentiment, a rate hike cannot be ruled out if potential inflation trends persist, even if the economy faces temporary pressures. Although Kuroda left the possibility of a rate hike in April open, the rise in Japanese government bond yields and oil prices are exacerbating the weakness of the yen. Rinto Maruyama, a foreign exchange and interest rate strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "The simultaneous rise in yields and depreciation of the yen can be understood as a pressure on the Bank of Japan from the market to raise interest rates. We need to closely monitor whether the Bank of Japan will actually raise interest rates based on this." Mimura's warning indicates that the Japanese government is prepared to consider various measures to address exchange rate fluctuations. Japanese Finance Minister Okatsuna Kagetsuki also stated last week that the Japanese fiscal authorities are ready to take decisive measures to address fluctuations in the currency market when necessary. When the yen fell below key levels like 160 yen to 1 dollar, Japanese authorities intervened multiple times in 2024 to support the yen exchange rate. In addition to direct market intervention, in recent years Japanese authorities have also taken various measures to counter speculative trading, including coordinating exchange rate inquiries with U.S. authorities, and holding trilateral meetings with senior officials from the Bank of Japan, Ministry of Finance, and Financial Services Agency. Mimura also cited market views that speculative activities in oil futures in recent months have been one of the factors contributing to exchange rate fluctuations. For Japan, around 90% of its oil imports are dependent on the Middle East. If the local conflicts continue, there is a risk of higher domestic inflation. According to data from the Ministry of Economy, Trade, and Industry of Japan, as of last week, gasoline prices in Japan had risen to a historical high of 190.8 yen per liter. Therefore, the Japanese government has decided to provide subsidies to oil refineries starting last week to maintain gasoline prices at around 170 yen per liter. The government will also take similar measures for other fuels, including diesel, heavy oil, and kerosene. Under the pressure of fundamentals, the threshold for Japanese intervention in the market has quietly risen Although the yen to dollar exchange rate is hovering near its lowest level of the year, traders believe that the threshold for Japanese intervention in the market has become higher. The rise in oil prices related to the Middle East conflict and solid U.S. economic data have fundamentally boosted the dollar, making it more difficult for the Japanese authorities to intervene in the market. Japan's high dependence on energy imports from the Middle East means that a rise in oil prices will harm the economy, which is already in a fragile recovery process, and raise inflation, naturally putting pressure on the yen. At the same time, the dollar has benefited from safe-haven flows, further reinforcing the downward trend of the yen. This is in contrast to January this year, when the yen's decline seemed to be primarily driven by positions and speculative momentum. Japanese officials have repeatedly emphasized that they are concerned about excessive volatility, rather than defending a specific exchange rate level. The yen briefly found support last month when Japanese Prime Minister Sanae Takichi won a landslide victory in the lower house elections. However, reports in the media that she was cautious about further rate hikes and her appointment of two dovish members to the Bank of Japan's policy board caused the yen to weaken again. From the perspectives of policy viability, international coordination, and market structure, the "effective space" and "trigger threshold" for Japanese authorities to intervene in the currency market are now significantly more restricted than in the previous rounds in 2022 and 2024. In those years, Japanese authorities intervened swiftly to stabilize the exchange rate, primarily to counter the continued selling of the yen by speculators utilizing the widening interest rate differentials between the U.S. and Japan for carry trade, which had a relatively positive effect on boosting the exchange rate. While officials like Mimura and Kagetsuki have publicly stated that they are "prepared to take decisive measures when necessary" which in the Japanese policy context is a clear reference to currency market intervention some foreign exchange market analysts point out that the current market is more dominated by "safe-haven buying of the dollar" rather than just speculative selling of the yen, so even if intervention occurs, the suppression effect may not be as direct as in previous rounds. Shota Ryu, a foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, previously stated, "Even if Japan intervenes now, the effect may not be very good because as long as the situation in the Middle East has not been resolved, the strong momentum of safe-haven dollar buying is likely to continue." He added, "Intervention may even bring a risk that once the yen rebounds, it will encourage speculators to sell the yen again." If the yen's decline becomes faster, more chaotic, and clearly deviates from orderly fluctuations, the Japanese Ministry of Finance may still step in, especially around 160 yen to 1 dollar or weaker levels. However, in terms of sustained effectiveness, what could truly change the yen's weakness is likely the easing of the Middle East situation, a drop in oil prices, or the Bank of Japan raising interest rates earlier than expected to narrow the U.S.-Japan interest rate differential.