Morgan Stanley: What Could Change the Weaker JPY Trend?
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Morgan Stanley examines the necessary conditions for a sustained yen appreciation amid a prevailing weakening trend. Since the escalation of Middle East tensions in late February 2026, Japan's deteriorating terms of trade, driven by rising oil prices and the effective closure of the Strait of Hormuz, have emerged as a primary driver of yen underperformance within the G10. The bank argues that a significant yen rebound requires the market to enter a defensive mechanism, characterized by a severe deterioration in global risk sentiment and expectations of more aggressive Federal Reserve rate cuts, even amid lingering inflation concerns.
Currently, de-escalation remains the baseline scenario. With resilient US macroeconomic data, USD/JPY may stay near the upper end of its trading range. However, the risk-reward profile for USD/JPY is shifting to the downside as the effective closure of the Strait of Hormuz appears increasingly protracted, raising the risk of demand destruction.
Japanese authorities have intensified verbal intervention, with Finance Minister Katayama emphasizing readiness to take decisive action against excessive FX volatility. As USD/JPY approaches the 160 level, the market cannot rule out the risk of coordinated intervention. The bank advises monitoring opportunities to turn bullish on the yen.