TOKYO, 2 April 2026 – The Japanese yen could weaken sharply toward 175 per US dollar in an extreme scenario of prolonged oil supply disruption, according to UBS, highlighting how energy markets have become the dominant force shaping global currency movements.
The projection comes as geopolitical tensions linked to the Iran conflict threaten to disrupt oil flows through the Strait of Hormuz, a critical chokepoint for global energy supply, intensifying pressure on energy-importing economies like Japan.
Oil Shock Rewriting Currency Market Dynamics
UBS’ outlook underscores a structural shift in global markets:
oil prices are now driving currencies as much as interest rates and monetary policy.
In a prolonged disruption scenario, oil prices could surge significantly, amplifying inflation risks and strengthening the US dollar. Analysts have warned that extended supply disruptions could push crude prices sharply higher, with severe macroeconomic consequences.
This dynamic favours the dollar, supported by safe-haven demand and the US’ position as a major energy producer, while weakening currencies of import-dependent economies.
Why the Yen Is Particularly Vulnerable
Japan’s heavy reliance on imported energy places the yen at the centre of this shock.
Rising oil prices translate into:
- Widening trade deficits, as import costs surge
- Increased demand for US dollars, since oil is priced in USD
- Higher inflation pressure, complicating domestic policy
Recent market movements already reflect this pressure, with the yen experiencing sharp volatility amid rising oil prices and geopolitical uncertainty.
175: A Stress Scenario With Policy Implications
A move toward USD/JPY 175 would represent a significant depreciation, far beyond recent stress levels and likely to trigger strong policy responses.
Japanese authorities have already signalled concern over excessive currency moves, warning they are prepared to act against disorderly market conditions.
Potential responses could include:
- Direct foreign exchange intervention
- Monetary policy adjustments by the Bank of Japan
- Unconventional strategies targeting energy markets
Notably, policymakers have even explored indirect approaches, such as influencing oil prices, to stabilise the yen, reflecting the severity of the situation.
Dollar Strength Reshapes Global Markets
A sustained rise in the US dollar would have far-reaching implications:
- Tighter global financial conditions, especially for emerging markets
- Pressure on Asian currencies, particularly energy importers
- Higher borrowing costs globally, as dollar funding tightens
Historically, energy shocks have amplified dollar strength, creating a divergence between energy-exporting and energy-importing economies.
Asian Investor Perspective: Currency Risk Returns to Centre Stage
For Asian investors, UBS’ forecast highlights a key theme for 2026:
currency volatility is back as a primary risk factor.
Key implications include:
- Increased FX volatility across Asia-Pacific markets
- Potential gains for export-oriented sectors benefiting from weaker currencies
- Rising hedging costs amid unpredictable currency swings
At the same time, prolonged dollar strength could weigh on regional growth, particularly in economies with high import dependency and dollar-denominated liabilities.
Charts & Levels (FX Snapshot)
- USD/JPY Trend: Upward bias amid oil-driven volatility
- UBS Scenario Target: 175 (extreme case)
- Key Driver: Oil supply disruption and inflation shock
- Policy Risk: Intervention by Japanese authorities
Outlook: Oil Will Dictate the Next Move
The trajectory of the yen, and broader FX markets, now hinges on a single factor:
the duration and severity of global oil supply disruptions.
If disruptions ease, the yen could stabilise and recover.
But if supply shocks persist, UBS’ 175 scenario may shift from a tail risk to a plausible outcome.
For now, the message from markets is clear:
in 2026, currencies are no longer just about central banks, they are about energy.
