What are the market implications for What’s Driving Renewed Yen Weakness as Geopolitical Tensions Between Iran and th?

The outlook for the yen suggests continued susceptibility to both BoJ policy signals and geopolitical developments. Should the market interpret forthcoming BoJ decisions as dovish, we can expect further weakening of the yen, subsequently affecting cross-currency flows and investor strategies in the FX market.

What’s Driving Renewed Yen Weakness as Geopolitical Tensions Between Iran and the US Rise?

Q: What's takeaway 1 on What’s Driving Renewed Yen Weakness as Geopolitical Tensions Between Iran and th?

Speculation around the BoJ is fueling yen depreciation amid geopolitical tensions.

Q: What's takeaway 2 on What’s Driving Renewed Yen Weakness as Geopolitical Tensions Between Iran and th?

The US dollar may see strength as market uncertainty grows.

Q: What are the risks to this view on What’s Driving Renewed Yen Weakness as Geopolitical Tensions Between Iran and th?

There are significant risks if geopolitical tensions escalate unexpectedly, which could lead to a flight to safety, benefiting the yen despite current trends. Additionally, if the BoJ shows commitment to maintaining its current policy stance longer than anticipated, it could counteract the negative sentiment towards the yen.

What the desk is arguing

Analysts assert that the yen is experiencing renewed weakness largely due to speculation surrounding the Bank of Japan's future policy direction. As market participants anticipate possible shifts in monetary policy amidst persistent inflationary pressures, the attractiveness of yen-denominated assets diminishes, resulting in depreciation.

Additionally, escalating geopolitical tensions, particularly between Iran and the United States, might further exacerbate volatility in currency markets, including the yen. While such tensions typically boost safe-haven currencies, the speculative focus on the BoJ's actions suggests that the yen may remain under pressure in this context.

Where it sits in our coverage

Our consensus target for USD/JPY is positioned at 1.075, which aligns with recent trends of yen weakening driven by changing investor sentiment and geopolitical factors. This reflects our understanding of the market's current appetite for risk amid global uncertainties, diverging from more conservative projections.

JPMorgan: $1.10 (Mar26)
Barclays: $1.08 (Mar26)
Goldman Sachs: $1.07 (Mar26)

How other firms see it

There are contrasting views among market participants. While some firms align with the broader view of yen weakness, others maintain a more cautious outlook, emphasizing the potential for a rebound should geopolitical tensions escalate further or if the BoJ's policy changes are not as imminent as speculated.

BofA: $1.04 (contrary stance, Mar26)
Deutsche Bank: $1.06 (contrary stance, Mar26)

Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 27th February 2026 and joining Lee to post some questions on the financial market themes for the week ahead is Seiko Kataoka-Fisher, Director from Japanese Customer Sales for EMEA in London. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.

It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Lee Hi Seiko The Japanese yen has underperformed this week, lifting the backup 156 level.

What have been the main drivers? Yeah, like you said, we've seen Dolly N moving higher again this week. The main drivers in our view are the media reports in Japan that Prime Minister Takahichi has voiced some apprehension over any further BOJ hikes when she met with BOJ Governor Aoida last week.

Previously it had been reported that no major issues had come up between the pair. But like I say, those media reports are suggesting that perhaps Takahichi there is trying to lean more on BOJ to slow down the pace of rate hikes going forward. So that has certainly re-energized the market to put back on short yen positions in anticipation of further weakness going forward.

And then on top of that as well, we also had announcement from Prime Minister Takahichi that she's nominated two academics to join the BOJ board from April and July of this year. And those two academics are known for supporting reflationist policies. So while we don't think their immediate appointments on the board would trigger an initial kind of change in BOJ policy, it does highlight that going forward that Prime Minister Takahichi looks like she's trying to kind of create a BOJ which is more supportive for maintaining kind of looser monetary policy to support kind of stronger growth and reflation going forward.

So that certainly is playing into the yen weakness that we've seen this week. But like I said, it hasn't triggered a significant kind of shakeup in terms of market pricing for BOJ rate hikes for this year. Markets still pricing in around 17 basis points of hikes by April and by about 50 basis points of hikes by the end of this year.

So in terms of the immediate market expectations, I think the next kind of key event to watch will be next week's speech from Deputy Governor Hamino at the start of next week. We'll be looking there to see if there's any potential shifts in BOJ rhetoric. At the moment, we're still very much kind of in line with market expectations and anticipating that the BOJ remains on course to hike rates again as soon as April.

Obviously, if that didn't materialize as we're expecting, then that could trigger some further yen weakness in the coming months. On top of that as well, I think the other factor which is also having a negative impact on the yen this week is the geopolitical development in the Middle East. We've seen obviously the price of oil moving further above $70 per barrel this week as market participants are nervous over the risk of some form of U.S. military action in Iran if they fail to reach a diplomatic solution in the coming week.

Like we've been saying before, I think if we did see a bigger or more sustained adjustment higher in the price of oil, I think that would hit European and Asian economies like Japan harder than the U.S. economy, and that I think would put upward pressure on the dollar, would certainly increase the risk of the dollar being stronger than our forecasts are anticipating going forward. We've also seen a weaker pound this week. The selloff has picked up after the by-election in Manchester.

How do you expect political risks to impact the pound? Yeah, like you said, we have seen the pound underperforming in recent days. Just today we saw the pound fall to its weakest level against the euro so far this year after the disappointing by-election results for the Labour Party.

In that by-election, we saw Labour dropping to third place, coming in behind the Greens and the Reform Party, so it was a big drop in terms of the popularity of the government. In the general election back in 2024, the Labour Party won a comfortable majority in the same seat, so to fall to third place is a pretty dramatic drop in their support. So yeah, that does put more pressure, I think, on Prime Minister Keir Starmer.

He previously had made the decision alongside the Labour leadership to prevent Manchester Mayor Andy Burnham from running in this by-election. That decision now has backfired and will raise further question marks over his decision-making as Prime Minister. You could also say as well that the strong performance of the Green Party could also encourage some Labour MPs to push for a more left-leaning candidate to replace Starmer if there was to be a leadership election going forward.

From a market perspective, the fear of a more left-leaning Prime Minister, I think that would certainly add to fiscal risks in the UK and could lead to a sell-off in the pound going forward as well. I would say, though, that we're not expecting an immediate leadership challenge to emerge at this point. I'd be surprised if that happened after just one by-election.

But if we were to see a similar kind of disappointing performance for the Labour Party at the upcoming local elections in May, then that would certainly intensify the pressure on Prime Minister Starmer and we could then see that leadership challenge emerging. So yeah, I think that's still to us is the key kind of point in time where we could see the pound come under more downward pressure would be around those local elections in May. For the week ahead, though, I think fiscal risks will still be in focus.

We do get the release of the spring statement, but we don't think this time that's going to be a big market mover. We're expecting that to show that the government's fiscal headroom is likely to be largely unchanged from back in the autumn when they estimated the headroom at just over 20 billion sterling. We'll also see some good news as well on the fiscal front, we think, for the government with the Debt Management Office expected to announce smaller amounts of gilt sales for the upcoming fiscal year of just under $250 billion.

That's down by about $60 billion from the current fiscal year. So it's not all bad news for the government, like I say, there does appear to be some good news on the fiscal front. But those political risks are likely to persist as a downside risk for the pound going forward.

Thank you very much, Hugh. Thank you. Thank you for listening to this MUFG Global Markets podcast.

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