To Save the Yen, Japan Considers an "Unconventional Move": Directly Shorting Crude Oil Futures!

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

According to a Reuters report on Thursday, the Japanese government is evaluating an unconventional plan—directly intervening in the crude oil futures market using foreign exchange reserves to establish short positions and drive down oil prices, thereby indirectly easing the pressure of yen depreciation.

Finance Minister Sanae Takaichi sent a clear signal this Tuesday. She shifted the focus from speculative behavior in the foreign exchange market to the crude oil futures market, stating that the latter is disturbing exchange rate trends and that "the Japanese government is ready to take comprehensive action on all fronts." This phrasing was interpreted by the market as Tokyo considering more creative intervention methods, at a time when the yen was nearing the psychological level of 160.

However, analysts and some government insiders are skeptical about the plan's actual effectiveness. Multiple sources believe there is no consensus within the government, and it is generally thought that even if implemented, the impact would be fleeting.

Shota Ryu, an FX strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "The government must realize that the impact of such intervention is inevitably temporary, serving more as a way to buy time for the situation in the Middle East to improve."

The Logic of the Unconventional Plan: Linkage Between Oil Prices, USD, and the Yen

The core logic of this policy concept lies in the increasingly tight linkage between the crude oil market and the foreign exchange market.

The ongoing Middle East conflict continues to push up energy prices while simultaneously driving safe-haven demand for the US dollar, creating a transmission chain of "rising oil prices → increased demand for USD to purchase oil → pressure on the yen." The Japanese government believes that the speculative surge in energy prices has become a major driver of the yen's weakness against the dollar, and traditional monetary easing and verbal intervention are no longer effective.

In terms of specific operations, the plan envisions using Japan's massive $1.4 trillion in foreign exchange reserves to sell futures contracts in the crude oil futures market, building short positions to suppress oil prices. This would reduce the market's demand for purchasing USD, thereby easing selling pressure on the yen. Japanese law allows the use of foreign exchange reserves for positions in the Futures Market, provided the objective is to stabilize the yen's exchange rate.

Notably, the emergence of this plan reflects Tokyo's deep concerns over traditional direct yen-buying intervention—against the backdrop of a potentially prolonged Middle East conflict, the continuous surge in USD demand could significantly dilute the effectiveness of any direct FX market intervention.

Internal Disagreement: Feasibility Doubted, Consensus Not Yet Formed

Although the plan has reached the stage of government discussion, internal consensus on its feasibility is far from being reached, according to Reuters citing three informed government sources.

One source stated bluntly: "Personally, I doubt whether it makes any sense for Japan to act alone." This points to the core weakness of the plan—there are fundamental questions about whether a single country's intervention in the futures market can rattle the global pricing system in the absence of international coordination.

Regarding specific operational details, it remains unclear which international platform Japan would use. Candidates include the New York Mercantile Exchange (NYMEX) for WTI crude oil futures, the Intercontinental Exchange (ICE) for Brent crude, and the Dubai futures market as the Asian benchmark. According to a second source, like FX intervention, the operation could take place on any platform.

Furthermore, the plan faces potential financial risks: If oil prices continue to rise, large-scale short positions would lead to substantial losses. In Japan's most recent round of FX intervention in 2024, each action consumed over $10 billion in foreign exchange reserves.

Analysts: Limited Effect, Key Lies in Physical Supply and International Cooperation

Market analysts generally hold reservations about the plan's actual effectiveness, believing that financial instruments cannot fundamentally resolve physical energy shocks.

Yuriy Humber, CEO of Tokyo consultancy Yuri Group, said, "The government's strategy is likely intended only to suppress short-term volatility and nothing more. It is impossible to solve a physical oil shock through financial means." He further noted that for intervention to have a substantial impact, it must be combined with the physical inflow of actual crude oil and, ideally, be an internationally coordinated action.

Tony Sycamore, a market analyst at IG in Sydney, estimated that Japan would need to commit at least $10 billion to $20 billion for the market to feel the intervention's effect. He stated bluntly, "Whether Japan acts alone or with others, I don't think it makes sense. The key to solving the problem is the reopening of the Strait of Hormuz."

On the front of 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 no final decision had been made at that time.

Previously, Japan had coordinated with the International Energy Agency and independently released parts of its oil reserves to ease the impact of supply disruptions on end-users. If the futures market intervention plan is implemented, it would be a further escalation building on those measures.