Middle East war reshapes the forex market game: Yen approaches the 160 alert level, and the Japanese government's intervention space is far less than two years ago.

Japanese Finance Minister Kozue Kodama said on Monday that as the yen continues to weaken significantly against the dollar amid ongoing tensions in the Middle East and approaches a key threshold of 160 yen to the dollar, the Japanese fiscal authorities are prepared to take decisive measures to address exchange rate market volatility when necessary. A new round of Middle East geopolitical conflict is pushing the yen exchange rate back towards the psychologically important level of 160 yen to the dollar, the highest level since July 2024, which is seen as a trigger threshold for Japanese fiscal intervention in the yen exchange rate. As of early Asian trading, the yen exchange rate was hovering around 159.55 yen to the dollar. "We are closely monitoring developments in the foreign exchange market with the strongest sense of urgency and are prepared to take decisive action if necessary. This is our position on this issue," Kodama said in response to questions from lawmakers in the Japanese parliament. In the expression of Japanese policymakers, "decisive action" refers to direct intervention in the currency market. At the time of Kodama's statement, the benchmark yen exchange rate (dollar to yen) was trading close to its weakest level this year, and due to escalating hostilities in the Middle East, the market remains volatile, driving global funds towards the U.S. dollar as a traditional safe-haven asset. Another familiar 160-point level Following Kodama's speech, the yen exchange rate strengthened slightly to around 159.30, but then quickly depreciated. In 2024, after the yen continued to weaken above the key level of 160, the Japanese fiscal authorities intervened several times. Previously, in July 2024, the dollar reached a high of 161.956 yen, the highest in nearly 38 years, shortly after which the Japanese Ministry of Finance intervened with around 5.5 trillion yen. However, with the rising price of oil putting enormous pressure on Japan's inflation and economic growth prospects that heavily rely on Middle East oil, and with global safe-haven buying continuing to surge towards the dollar amidst Middle East hostilities, the Japanese Ministry of Finance's space for intervention in the foreign exchange market is likely much narrower now than in the past. Unlike in 2022 and 2024 when Tokyo swiftly intervened in the currency market to counter speculative selling of the yen driven by the increasingly wide interest rate differential between the U.S. and Japan for carry trades, the recent depreciation of the yen beyond the 159 level is more due to the strong demand for the dollar as a safe-haven and market concerns that the soaring oil prices could harm Japan's already fragile economic recovery. At the time of Kodama's speech, the dollar continued to benefit from a surge in safe-haven buying, which was a response to the escalating tensions in the Middle East and supported by strong economic data. The overall strength of the dollar may weaken the rationale for Japan to unilaterally support the yen. Options market trends show that traders are betting that the dollar against a basket of major currencies will continue to rise. This situation is in stark contrast to earlier this year when the depreciation of the yen appeared to be more driven by speculative momentum. In January, after the Bank of Japan remained on hold, Tokyo and Washington's fiscal authorities jointly conducted a rate inquiry inspection, causing the yen to rise from 159 yen per dollar to 152 yen within a few hours. This week, this exchange rate combination will face another crucial test as both the Federal Reserve and the Bank of Japan will announce their monetary policy decisions. It is widely expected that the Bank of Japan will maintain its policy unchanged on March 19, although more than one-third of surveyed economists believe that there is a possibility of a rate hike in April. The market also anticipates that the Federal Reserve will remain on hold this week, while economists persist in predicting two rate cuts by the end of the year. Regarding the situation in the Middle East, Kodama also mentioned that the G7 finance ministers expressed common concerns about extreme market volatility, including in the foreign exchange markets, when discussing the developments in the region last week. Prime Minister Sanae Takai, who also spoke in parliament on Monday, said Japan will continue diplomatic contacts with Iran. She also added that she hopes to discuss how to end the conflict in the Middle East quickly when she meets with U.S. President Donald Trump in Washington on Thursday. The Japanese government's exchange rate intervention effectiveness is being reshaped by the ongoing conflict. From the three aspects of policy prospects, international cooperation space, and market structure, the "effective space" and "trigger threshold" for Japan's Ministry of Finance to intervene in the currency market are significantly more limited than in previous rounds in 2022 and 2024. Although Kodama has publicly stated that they are "prepared to take decisive action when necessary," some foreign exchange market analysts point out that the market currently is more dominated by "risk-off buying of the dollar, rather than just speculative selling of the yen. Therefore, even if intervention is taken, the suppression effect may not be as direct as in previous rounds. The key change is that the reason for the recent yen weakness is different from that in 2022 and 2024. Back then, Tokyo intervened primarily to counter the yen selling caused by carry trade transactions exploiting the interest rate differential between the U.S. and Japan. Analysts now explicitly mention that the recent decline of the yen towards 160 is more due to the escalation of the Middle East conflict pushing up oil prices, pressure on Japan's economic prospects, and the continuing flow of global funds towards the dollar as a safe-haven. Some Japanese government officials even bluntly stated that this depreciation looks more like "buying the dollar" rather than "selling the yen." In this context, unilateral buying of the yen becomes naturally more difficult to reverse the trend. The latest statistics from the CFTC show that in early March, there were only 16,575 net short yen contracts, much lower than the around 180,000 contracts during Japan's large-scale yen buying intervention in July 2024. In other words, the current environment is not conducive to government intervention forcing out speculative positions. If the yen's decline becomes faster, more chaotic, and clearly deviates from orderly fluctuations, the Japanese Ministry of Finance may still intervene, especially around the 160 level or weaker positions. However, in terms of sustained effectiveness, what can truly change the situation is likely a de-escalation of the Middle East situation, a decline in oil prices, or an earlier-than-expected rate hike by the Bank of Japan to narrow the U.S.-Japan interest rate differential.