I think it’s better to use a rule to populate the values. Instead of relying on a static dependency chain, you could use a rule to populate X for Z when Y is selected. This avoids having to directly link X to Z in the provisioning policies and helps SailPoint understand the context without creating a circular dependency.
Even though Z → Y → X looks straightforward, SailPoint might be recognizing that Application Z now has two paths to X: one through Y and one directly from Z. This dual path can cause confusion and be flagged as a circular dependency.