Mitsubishi UFJ warns: Escalation of US-Iran conflict could render yen intervention ineffective; rising oil prices and higher Fed rate hike expectations may limit Japan's ability to curb depreciation.

(1) Mitsubishi UFJ Financial Group analyst Derek Halpenny pointed out that the continued escalation of the US-Iran conflict may make it difficult for Japan to effectively curb the depreciation of the yen against the US dollar. US President Trump on Thursday hinted that a decision on whether to launch an unprecedented large-scale strike against Iran was imminent. (2) If the conflict further pushes up oil prices, the market will reinforce expectations of a Federal Reserve rate hike. The pressure of widening US-Japan interest rate differentials will directly weaken the effectiveness of Japan's unilateral intervention in the foreign exchange market. Halpenny believes that the above scenario will ensure Japan continues to face restrictions in curbing further gains of the dollar against the yen. (3) The yen is currently at its lowest level in nearly forty years, facing dual pressure from a strong dollar driven by geopolitical risks and rising energy import costs. Japan’s Ministry of Finance and central bank are facing increasingly severe tests for their policy options.