Just about everything has gone wrong for Japan ever since the US-Iran conflict started. The war in the Middle East has not only caused a surge in oil prices, hampering supply to the Japanese economy, but also thrown plans by both the Ministry of Finance (MOF) and Bank of Japan (BOJ) into disarray.

The Japanese yen currency has struggled in the past two weeks, not least with the economic outlook being downgraded but also as BOJ rate hike odds fade despite growing promise ahead of the spring wage negotiations outcome. The latter was meant to tee up the next rate hike by the central bank. However, it is now looking to be just a maybe factor at best amid all else that is happening.

In January and February itself, we’ve seen Tokyo officials step in with speculated ‘rate checks’ in pushing back against USD/JPY gains. But in having to consider the US-Iran conflict now, they’ve not yet taken the more decisive step in actually intervening in the market. So far today, all they have done is deliver another verbal warning as seen here.

So, what’s next for USD/JPY?

As we get closer to the 160 level, it is clear that the pain threshold for the MOF is starting to be reached. That was a clear line that they appeared to have drawn in the weeks before. However, they still also have to pick their battles when they actually do try to intervene in the market. And right now, external forces are working against them. So, that could be one reason to hold back for just a little bit more.

As the Takaichi trade remains well anchored, the fear with any intervention is that it might not stay the course. That was the case back in July 2024 when USD/JPY was hit down from above 160 and fell to a low around 140. But by January 2025, the currency pair had recovered all the way back to near 159 before the dollar faltered.

In the present situation, the strong negative drag on the yen currency is another factor working against any intervention efforts. And that may be one key reason holding back Tokyo officials for now. They most likely could be waiting, and surely hoping, that the US-Iran conflict settles down soon.

All that being said, the closer we get to 160 and test levels above that, it is surely testing the tolerance and patience of the MOF. Having already indirectly drawn a line near the figure level in the past two months, they might be firm to assert their position of authority over markets if traders get a little too frisky in running USD/JPY up above that in quick fashion.

So, just keep that in mind as the pair hovers just above 159 now at its highest levels since July 2024.