The conflict in the Middle East is pushing Japan’s economy toward stagflation and prompting foreign investors to sell Japanese stocks and bonds. The government is trying to counter the rise in the USD/JPY pair. Will it work? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Foreign investors are actively selling Japanese stocks.
- Capital outflows are hurting the yen.
- The Bank of Japan warns of the looming stagflation.
- Consider adding to the long trades opened at 158.5.
Weekly Fundamental Forecast for Yen
Japan emerged as a key casualty of the Middle East conflict, with the yen and related assets under heavy pressure, prompting investors to sell. Foreign investors have been accelerating those sales since September 2024. Capital outflows and rising stagflation risks are driving the USD/JPY pair higher, despite government efforts to stem the yen’s slide. The question is whether verbal intervention alone can deter speculators.
Net Foreign Purchases of Japanese Stocks
Source: Bloomberg.
The Bank of Japan stated that higher oil prices are weighing on corporate profits and consumer spending, warning that escalating tensions in the Middle East could further strain the economy. Companies are already raising prices amid higher energy costs, supply chain disruptions, and a weak yen. Meanwhile, households have cut spending for a third straight month, despite a rise in real wages.
Japan’s Household Spending
Source: Bloomberg.
Therefore, the economy is potentially moving toward stagflation, leaving the Bank of Japan with a difficult choice. Should it raise rates to contain inflation or keep policy loose to support demand? Futures markets are pricing in about a 70% chance of monetary policy tightening, which is already curbing USD/JPY bulls.
Another risk is the threat of currency intervention. The government keeps signaling it, and the dollar’s approach to the ¥160 level is making investors increasingly nervous. Japanese Finance Minister Satsuki Katayama said Donald Trump’s remarks are fueling volatility across global markets, adding that authorities are ready to respond at any time with appropriate measures.
UBS analysts doubt Japanese authorities can stop the USD/JPY pair from rising further. The bank argues that if Brent crude climbs to $150 a barrel, pressure on the yen will intensify, making FX intervention less effective. Any intervention-driven pullbacks are likely to attract fresh buyers. UBS also warns that if the government shifts toward fiscal measures to offset the impact of inflation, investors may see it as a reluctance to support the currency. In that scenario, the dollar may advance toward ¥175.
A more bearish scenario would involve a further escalation of the conflict in the Middle East. This could happen if Donald Trump does not extend the ultimatum deadline and the US moves to target Iran’s energy infrastructure. In that case, Brent could push above its March highs, putting additional pressure on the yen.
Weekly USDJPY Trading Plan
Further gains in USD/JPY may prompt currency interventions, raising the risk of a sharp pullback. This decline can be used to open new long trades or add to those initiated at 158.5.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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