In order to save the yen, Japan is considering an unconventional move: directly shorting crude oil futures!

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The battle to defend the yen is giving rise to an unprecedented policy concept.

According to a Reuters report on Thursday, the Japanese government is evaluating an unconventional plan—using foreign exchange reserves to directly intervene in the crude oil futures market by establishing short positions to lower oil prices, thereby indirectly easing the pressure on yen depreciation.

Finance Minister Satsuki Katayama sent a clear signal this Tuesday. She shifted the focus from speculative activity in the forex market to the crude oil futures market, saying the latter is disturbing exchange rate trends, and stated that "the Japanese government is always ready to take comprehensive action on all fronts." This statement was interpreted by the market as Tokyo considering more creative intervention measures, at a time when the yen exchange rate was approaching the key psychological level of 160.

However, analysts and some government insiders are skeptical about the actual effect of the plan. Several knowledgeable sources believe there is no consensus within the government, and it is generally believed that even if implemented, the effect will only be temporary.

Shota Ryu, a forex strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "The government certainly knows the impact of such intervention is inevitably temporary, and it's more about buying time for an easing of the Middle East situation."

Unconventional plan logic: Linkage among oil prices, the dollar, and the yen

The core logic of this policy idea lies in the increasingly close linkage between the crude oil market and the forex market in recent times.

Ongoing conflicts in the Middle East continue to drive up energy prices, while also boosting demand for the US dollar as a safe haven, creating a transmission chain of "rising oil prices → increased demand for oil-buying dollars → pressure on the yen." The Japanese government believes that the speculative surge in energy prices has become a key driver of yen weakness against the US dollar, while traditional monetary easing policies and verbal interventions have become less effective.

In terms of specific operations, the plan envisions using up to $1.4 trillion of Japan’s foreign exchange reserves to sell futures contracts in the crude oil market, building short positions to lower oil prices, thus reducing market demand for dollars and easing selling pressure on the yen. Japanese law allows foreign exchange reserves to be used for futures market positions as long as the objective is to stabilize the yen exchange rate.

Notably, the emergence of this plan reflects a deep-seated concern in Tokyo about traditional direct yen purchase intervention methods—amid the possibility of continued conflict in the Middle East, sustained demand for dollars could greatly diminish the effectiveness of any direct forex market interventions.

Internal disagreement: Feasibility in question, no consensus yet

Although the plan has entered government discussion, according to Reuters, quoting three government insiders, there is still far from a consensus internally regarding its feasibility.

One insider bluntly said, "Personally, I doubt whether such a move has any point if Japan acts alone." This points to a core weakness in the plan—lacking international coordination, it is fundamentally questionable whether a single country's intervention in the futures market can sway global pricing systems.

Operationally, it is not yet clear on which international platform Japan would implement the intervention; candidates include the New York Mercantile Exchange (NYMEX) which trades WTI crude, the Intercontinental Exchange (ICE) trading Brent crude, and the Dubai futures market, the Asian benchmark. According to a second insider, like forex intervention, the operation could be conducted on any platform.

Additionally, the plan faces potential financial risks: If oil prices continue to rise, large-scale short positions could result in substantial losses. In the most recent round of forex market interventions in 2024, Japan spent more than $10 billion per round of action.

Analysts: Limited effect, key lies in physical supply and international cooperation

Market analysts are generally skeptical about the actual effect of the plan and believe that financial instruments cannot fundamentally resolve the shock to physical energy supply.

Yuriy Humber, CEO of Tokyo consultancy Yuri Group, said, "The government's strategy is likely only aimed at containing short-term volatility and nothing more. It is impossible to resolve a physical oil shock through financial means." He further pointed out that for the intervention to have a substantial impact, it must be coordinated with actual flows of physical crude oil, and ideally should involve international cooperation.

Tony Sycamore, a market analyst at IG in Sydney, estimated that Japan would need to spend at least $10-20 billion for the intervention to be noticed by the market. He said bluntly, "Whether Japan acts alone or together with other countries, I think it is basically meaningless. The key to resolving the issue is reopening the Strait of Hormuz."

Regarding international coordination, a senior White House official stated on March 5 that the US was considering potential actions involving the crude oil futures market, but had not made a final decision at the time.

Previously, Japan had already coordinated with the International Energy Agency and partially released oil reserves alone to mitigate the impact of supply disruptions on end-users. If the futures market intervention plan is implemented, it would be a further upgrade on top of those measures.

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