By Tom Westbrook and Junko Fujita
TOKYO, June 15 (Reuters) - War in the Middle East pushed the yen to the brink of multi-decade lows and prompted the government to prop it up -- a peace deal, however, won't pull it back from the precipice.
Stocks and bonds soared on Monday on news of the planned Iran-U.S. halt to a war that has inflamed global inflation expectations, particularly in energy importers like Japan. But the yen barely budged, holding above the 160 per dollar level that invited official
intervention just last month.
The fragile yen now enters a challenging week with a crucial central bank meeting that is expected to lift interest rates to a 31-year high but risks disappointing investors looking for more hawkish signals.
All eyes will be on how Bank of Japan Deputy Governor Shinichi Uchida, who will brief the media on behalf of recently hospitalised Governor Kazuo Ueda, frames the outlook for the BOJ's rate-hike path.
While Uchida isn't expected to veer far from Ueda's script, cautious commentary could embolden yen bears.
"The yen is still rather weak on the background of the BOJ still being behind the curve," said Naka Matsuzawa, chief strategist at Nomura Securities. "I don't really think the BOJ can satisfy the market expectations on hawkishness. The BOJ doesn't want to go too much ahead of the government policy stance, only to become a scapegoat."
Although markets are all but certain the BOJ will raise its key rate by 25 basis points on Tuesday to 1%, that has done little to dispel yen pessimism, with speculative net short positions climbing to the highest since July 2024, futures data showed on Friday.
UCHIDA TAKES CENTRE STAGE
Recent speeches by Ueda focused on the potential for energy prices to pass through to the broader economy. With Ueda now out of action due to treatment for an infected liver cyst, the spotlight shifts to Uchida, who was only discharged from hospital last month, adding a layer of uncertainty on what he could say after a long period of silence.
"Market players tried to read the difference in Ueda's comments at each press conference to gauge his stance, but this time, they can't do that," said Kumiko Ishihara, a senior analyst at Sony Financial Group.
As the career central banker-turned deputy, Uchida has delivered strong clues on near-term policy shifts, including its decision in 2024 to exit a massive, decade-long stimulus. While some analysts brand him as a dove, people who know him describe Uchida as a pragmatic policymaker who takes a flexible approach to communication.
A peace agreement would align with the baseline scenario under which the BOJ sharply revised up its inflation forecasts and warned of mounting price pressures from the war. The central bank's former top economist Seisaku Kameda said on Monday that the latest developments in the Middle East won't change the BOJ's expected move of two interest rate hikes this year.
MIDDLE EAST TRUCE ALTERS CALCULUS
A prolonged war could have kept inflation near 3% for two years, which could have justified faster rate hikes by the BOJ as it seeks to avoid being behind the curve.
An end to Middle East hostilities, therefore, changes that calculus.
"Given the drop in oil prices, the risk for accelerating inflation may weaken," said Masahito Sugawara, a senior strategist at Daiwa Securities. "Market players have been bracing for a hawkish stance from the BOJ, but the post-meeting comments from Deputy Governor Uchida may not be as hawkish as they had expected."
Markets are pricing in one more rate increase by the BOJ later this year. It was once the only central bank among major economies to be on a tightening cycle, but inflation from the Gulf war has changed that. Expectations are now growing that the Federal Reserve's next move will be a hike.
"Overall, gradual yen appreciation is expected, but it will be important to watch for a rise in volatility around central bank events," said Hirofumi Suzuki, chief FX strategist at SMBC. "If expectations for further rate hikes (by the Fed) continue against the backdrop of U.S. inflation, there is a meaningful possibility that the dollar will remain strong."
When the BOJ held on rates in April, the yen continued its slide past the key 160 per dollar level, prompting the Ministry of Finance to spend 11.7 trillion yen ($73.12 billion) to bolster the currency, a record monthly amount.
As hawkish hopes dim for the BOJ, the only thing standing in the way of a continued slide in the yen may be more intervention.
"There is a risk that pressure will arise on the yen and dollar-yen rate could move toward 161," said Masafumi Yamamoto, chief foreign exchange strategist at Mizuho Securities. "Concerns over intervention will likely increase."
($1 = 160.0100 yen)
(Reporting by Junko Fujita, Leika Kihara, Noriyuki Hirata, Makiko Yamazaki in Tokyo, Tom Westbrook in Singapore; writing by Rocky Swift; Editing by Sam Holmes)
