Future scenario analysis of the Middle East situation

■ The US military directly intervened in the Middle East on the 21st, and the financial market is expected to become nervous on the 23rd due to risk aversion.  
■ Currently, we are awaiting Iran's retaliation, and it is important to consider both optimistic and pessimistic scenarios and respond calmly. 
 
   On June 21st, US time, President Trump issued a statement announcing that US military bombers successfully attacked three Iranian nuclear facilities. Prior to this, the US President called on Iran to surrender unconditionally on the 17th, and on the 19th stated that "it will decide whether the United States will intervene in the conflict between Israel and Iran in the next two weeks." Currently, the financial market is taking a wait-and-see approach, anticipating Iran's retaliatory measures, but it is expected that market risk aversion will further intensify after the market opens on June 23 (Monday). This article briefly compares possible optimistic and pessimistic scenarios. 
 
   In the typical optimistic scenario, Iran's retaliation is expected to be limited to targeted strikes on US military bases in the Middle East. If Iran and the US engage in a full confrontation, the situation could escalate severely and potentially lead to the overthrow of the Iranian regime. Therefore, it is believed that Iran will cease fighting after a limited counterattack against Israel and the US, and will resume negotiations with the US and other countries on nuclear development. In this case, financial market risk aversion will be relatively restrained, and global attention to the Middle East situation will gradually decrease. 
 
   In the typical pessimistic scenario, Iran might implement a blockade of the Strait of Hormuz, a critical route for Middle Eastern crude oil to reach Asia. Blocking the Strait would cause oil prices to spike significantly, greatly amplifying risk aversion sentiments in the financial markets. As a result, the US dollar, used as the settlement currency for crude oil, would likely remain strong in the foreign exchange market. Conversely, Japan, as a crude oil importer, could see a sharp depreciation of the yen due to concerns over a widening trade deficit. According to data from the Commodity Futures Trading Commission (CFTC) as of June 10, non-commercial sector yen buying positions (total), indicating speculative activity, stood at about 184,000 contracts. If these positions are collectively liquidated, the USD/JPY exchange rate could temporarily surge past 150 yen. 
 
   Currently, the risk of Iran blocking the Strait of Hormuz appears low, and the situation leans more toward the optimistic scenario. China, being a friendly country to Iran and an importer of crude oil, would likely oppose Iran’s blockade. If other Middle Eastern countries rely on the Strait for oil transport, strongly criticizing Iran could lead to Iran’s isolation from China and regional countries. Iran probably hopes to avoid this scenario. However, given the US government’s tough stance, the development of a pessimistic scenario cannot be ruled out. Financial markets are expected to remain volatile in the near term, and investors should stay calm and respond appropriately.