UBS Forecasts Yen Depreciation Amidst Energy Crisis

UBS Group AG has projected that the dollar-yen exchange rate could reach 175 by the end of 2026, driven by a prolonged disruption in global energy supplies and a weaker yen. The bank's strategists, including Shahab Jalinoos, indicate that if oil prices rise to $150 per barrel, attempts by Japanese officials to intervene in foreign exchange markets may inadvertently lead to further yen depreciation. This scenario is characterized by a significant increase in Japan's import costs, exacerbating its trade deficit and putting additional pressure on the yen.

UBS warns: Yen may fall to 175, intervention will only "drain foreign exchange reserves without turning the tide"UBS sees dollar-yen reaching 175 amid prolonged oil disruptionBloombergUBS Warns: Oil Disruption Could Force USD/JPY to 175 as Japan’s Yen Weakness Hits Cyclical Peak

The yen's decline is attributed to several interrelated factors. Japan's reliance on energy imports, particularly from the Middle East, makes it vulnerable to fluctuations in global oil prices. With over 95% of its oil imports sourced from this region, any disruptions—such as those stemming from the ongoing Israel-Iran conflict—can significantly impact Japan's trade balance. UBS analysts note that the recent rise in the dollar-yen pair above 160 has prompted stern warnings from Japanese policymakers, including Finance Minister Shunichi Suzuki and Bank of Japan Governor Kazuo Ueda, who have emphasized the need for vigilance against further yen weakening.

UBS warns: Yen may fall to 175, intervention will only "drain foreign exchange reserves without turning the tide"UBS sees dollar-yen reaching 175 amid prolonged oil disruptionUBS Warns: Oil Disruption Could Force USD/JPY to 175 as Japan’s Yen Weakness Hits Cyclical Peak

The Bank of Japan faces a challenging situation, as it cannot aggressively ease monetary policy without undermining its inflation targets, which are already under pressure from high import costs. This constraint limits the effectiveness of potential interventions aimed at stabilizing the yen. UBS suggests that fiscal measures, such as energy subsidies, may become more critical in addressing inflation rather than relying solely on foreign exchange interventions.

UBS sees dollar-yen reaching 175 amid prolonged oil disruption

Critics of the current approach argue that the Japanese government’s failure to stabilize the yen could lead to a prolonged economic downturn. The depreciation of the yen has already contributed to a cost-of-living crisis, prompting political instability, including the resignation of two prime ministers prior to the current leadership of Sanae Takaichi. Additionally, U.S. officials, including President Trump, have expressed concerns regarding Japan's weak currency, suggesting it provides an unfair advantage to Japanese manufacturers in trade negotiations.

UBS warns: Yen may fall to 175, intervention will only "drain foreign exchange reserves without turning the tide"UBS sees dollar-yen reaching 175 amid prolonged oil disruptionUBS Warns: Oil Disruption Could Force USD/JPY to 175 as Japan’s Yen Weakness Hits Cyclical Peak

• “attempts to curb inflation through FX intervention might instead provide the market with higher levels to sell yen, potentially depleting foreign exchange reserves without necessarily altering the currency trajectory.” — Shahab Jalinoos, UBS Group AG

UBS warns: Yen may fall to 175, intervention will only "drain foreign exchange reserves without turning the tide"

• “Japan’s top FX official, Masato Kanda, signaled possible “bold action,” while Bank of Japan Governor Kazuo Ueda reiterated that exchange rate movements are a policy consideration.” — Kazuo Ueda, Bank of Japan Governor

UBS warns: Yen may fall to 175, intervention will only "drain foreign exchange reserves without turning the tide"

UBS anticipates that the trajectory of the dollar-yen pair will hinge on the resolution of the Middle East conflict. A de-escalation could stabilize oil prices and alleviate some of the structural pressures on Japan's trade balance. Conversely, if disruptions persist, the dollar-yen exchange rate may continue to rise, potentially reaching the projected 175 level. The bank's long-term outlook suggests a gradual decline in the exchange rate, with expectations of USD/JPY at 148 by December 2026, assuming that inflationary pressures stabilize and central banks refocus on growth.

UBS Warns: Oil Disruption Could Force USD/JPY to 175 as Japan’s Yen Weakness Hits Cyclical PeakUBS sees dollar-yen reaching 175 amid prolonged oil disruptionUBS warns: Yen may fall to 175, intervention will only "drain foreign exchange reserves without turning the tide"