Japan one step from historic yen collapse, SMBC Nikko warns

SMBC Nikko warns Japan is one step from a historic yen collapse, citing oil price risk and fiscal loosening, as Finance Minister Katayama pledges action if needed.

Summary: Sources: SMBC Nikko Securities reported by the Wall Street Journal; Finance Minister Katayama

• SMBC Nikko strategist Makoto Noji warned Japan may be on the verge of a historic yen collapse, driven by prolonged oil price risk and fiscal loosening
• Noji called for rate hikes, a halt to fiscal expansion, and further intervention acting together, arguing no single measure is sufficient alone
• Finance Minister Katayama said the government would take appropriate action in currency markets if necessary

Japan may be just one step away from a historic yen collapse, according to SMBC Nikko Securities strategist Makoto Noji, who warned that prolonged oil price pressure and fiscal loosening have pushed the currency to a dangerous threshold.

Three years of cost-push inflation have already severely burdened Japanese households, and Noji argued that any demand stimulus at this juncture would only accelerate inflation further. His prescription is a combination of further yen-buying intervention, Bank of Japan rate hikes, and a firm halt to fiscal expansion, warning that intervention alone cannot substitute for structural adjustment.

The challenge is acute. Japan cannot control the Hormuz-driven oil shock, making domestic policy the only available lever. Every fiscal concession made to ease cost-of-living pressure carries a currency cost that intervention must then offset, a dynamic that is becoming increasingly difficult to sustain. Finance Minister Katayama said Tuesday the government would take appropriate action in currency markets if necessary.

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The warning from SMBC Nikko lands on a market already aware that Japan deployed a record single-period intervention recently, suggesting the authorities are fighting hard to hold a line that fundamentals are pressing against. A prolonged oil price surge, a direct consequence of the Hormuz closure, is the external variable Tokyo cannot control, making the domestic policy response, rate hikes and fiscal restraint, the only available lever. Any signal that the government is unwilling or unable to tighten fiscal policy would be taken badly by the yen. Katayama's readiness-to-act language provides short-term support, but the SMBC Nikko framing suggests intervention alone cannot substitute for structural adjustment.