According to MUFG’s Head of Research Derek Halpenny, the Japanese Yen (JPY) is beginning to benefit from rising risk aversion in global markets, with the US Dollar maintaining its position as the top-performing G10 currency, followed by the Canadian dollar and then the yen [1]. Halpenny notes that if risk aversion intensifies further and safe-haven flows into US Treasuries increase, the yen's performance is likely to improve [1].
Bank of Japan (BoJ) Governor Ueda reiterated in the Diet that the BoJ would raise its key policy rate if the economy evolves as expected. However, he added that the ongoing conflict in the Middle East could have a 'significant impact on the global economy' and, by extension, the Japanese economy [1]. This geopolitical uncertainty is affecting expectations for an April BoJ rate hike, which is currently priced at 15 basis points, down from 17 basis points last Friday. Halpenny suggests that if the conflict persists, it would be difficult for the BoJ to proceed with a rate hike in April [1].
There is also an increased risk of yen intervention at weaker levels, particularly as the currency approaches the 160 level against the US dollar. Finance Minister Katayama referenced a 'shared understanding' among G7 countries that currencies should move in a 'stable manner,' implying that intervention would be easier to justify under current circumstances. The Ministry of Finance (MoF) would likely be encouraged to intervene if the yen moves toward the 160-level [1].
Despite these factors, the potential for yen strength due to mass liquidation of short positions is limited, as leveraged funds’ short yen positions have already been reduced to their smallest size since August last year [1].
CONCLUSION
The Japanese Yen is seeing support from increased risk aversion and safe-haven flows, but policy uncertainty and geopolitical risks are dampening expectations for an April BoJ rate hike. Intervention risks remain elevated near the 160 level, though the impact may be muted due to reduced short positioning. Overall, market sentiment is cautious, with medium impact expected as investors monitor developments in the Middle East and BoJ policy signals.