If oil supplies continue to be disrupted, will the yen fall to 175?

Ask AI · Why Japanese foreign exchange intervention may backfire in a stagflation environment?

UBS believes that even if Japanese officials continue to strengthen verbal intervention, if an oil price shock persists, the yen’s downtrend may be difficult to stop.

On Wednesday, April 1, UBS strategists warned in a report that in an extreme scenario where oil prices surge sharply, the USD/JPY could rise to 175 by year-end. At that time, Japan’s foreign exchange intervention measures may backfire and be unable to reverse the yen’s weak trajectory.

In the Thursday Asia-Pacific session, What We’re Seeing at Wall Street noted that in Trump’s nationwide phone remarks about Iran’s situation, he “did not send a clear de-escalation signal,” quickly dashing the market’s optimistic expectations that the conflict would wrap up fast. The USD/JPY swiftly clawed back most of this week’s losses and once again moved close to around 160.

Last Friday, the USD/JPY exchange rate first broke through the 160 level since 2024, triggering a flurry of warnings from Japanese policy officials.

Japan Ministry of Finance official in charge of exchange-rate affairs, Atsushi Mimura, warned of the risks of “decisive action,” Bank of Japan Governor Haruhiko Ueda reiterated that exchange-rate movements are a factor considered in monetary policy, and Japan’s Finance Minister Satsuki Katayama also said that it is ready to respond at any time. The officials’ “multiple-pronged” statements indicate that the authorities are highly alert to further yen weakness.

Intervention in a stagflation environment may backfire

UBS strategist Shahab Jalinoos’ team pointed out that if oil rises to around $150 per barrel, the approach of suppressing inflation via foreign exchange intervention may end up backfiring. The report states:

This move (foreign exchange intervention) may only provide the market with a higher yen selling price level, while the cost would be consuming foreign exchange reserves, and it may not necessarily change the exchange-rate trajectory.

UBS believes that under this scenario, the authorities’ tools to rein in inflation may shift even more toward fiscal measures—such as energy subsidies—rather than relying on foreign exchange intervention.

In the report, UBS describes a more pessimistic “persistent shock” scenario: if the world enters a stagflation environment, the market may conclude that Japan’s policy makers have no intention of preventing the yen from continuing to depreciate.

Driven by this assessment, the shock formed by worsening terms of trade will push the USD/JPY significantly higher, with the year-end target reaching 175.