What’s Driving Renewed Yen Weakness as Geopolitical Tensions Between Iran and the US Rise?
The desk is positioning for continued yen weakness driven by speculation surrounding the Bank of Japan's (BoJ) potential policy shifts, as highlighted in the recent commentary from MUFG EMEA. With geopolitical tensions between Iran and the US adding further complexity to the FX landscape, the yen's depreciation may accelerate as traders adjust their expectations. Per the full note source, the market is increasingly pricing in a shift from the BoJ, which could lead to a widening interest rate differential favoring the US dollar. This dynamic is reflected in the recent moves in USD/JPY, which has seen a notable uptick as market sentiment shifts.
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)
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Speculation around the BoJ is fueling yen depreciation amid geopolitical tensions.
- 02The US dollar may see strength as market uncertainty grows.
- 03Diverse forecasts from other firms indicate different perspectives on yen resilience.
Market implications
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.
Risks to this view
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.
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.
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