To save the yen, Japan considers taking a bold approach: directly shorting crude oil futures!

The yen defense battle is giving rise to an unprecedented policy idea.

According to Reuters on Thursday, the Japanese government is evaluating a 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 the yen depreciation.

Finance Minister Aso Taro signaled this week on Tuesday that the focus has shifted. She has moved her attention from speculative activities in the foreign exchange market to the crude oil futures market, stating that the latter is disrupting exchange rate trends, and that “the Japanese government is ready to take comprehensive action on all fronts at any time.” This wording was interpreted by markets as Tokyo considering more creative intervention measures, as the yen approached the psychological threshold of 160.

However, analysts and some government insiders remain skeptical about the actual effectiveness of this plan. Several informed sources believe there is no consensus within the government, and that even if implemented, the effects would likely be short-lived.

Shota Ryu, a forex strategist at Mitsubishi UFJ Morgan Stanley Securities, said, “The government is clearly aware that such intervention’s impact will inevitably be temporary, more so to buy time amid the Middle East situation.”

Unconventional Plan Logic: The Link Between Oil Prices, the US Dollar, and the Yen

The core logic of this policy idea lies in the increasingly close linkage between recent oil markets and foreign exchange markets.

The ongoing Middle East conflict continues to push energy prices higher, while also boosting demand for US dollar safe-haven assets, creating a transmission chain of “oil prices rise → increased dollar demand for oil purchases → pressure on the yen.” The Japanese government believes that speculative surges in energy prices have become a significant driver of the yen’s weakness against the dollar, and traditional monetary easing and verbal interventions are no longer effective.

In practical terms, the plan envisions deploying Japan’s foreign exchange reserves, which amount to up to $1.4 trillion, to sell futures contracts in the crude oil market, establishing short positions to lower oil prices, reduce market demand for dollars, and thus ease the yen’s depreciation pressure. Japanese law permits using foreign exchange reserves for futures market positions, provided the goal is to stabilize the yen exchange rate.

It’s noteworthy that the emergence of this plan reflects Tokyo’s deep concerns about traditional direct yen purchase interventions—given the potential for ongoing Middle East conflicts, persistent US dollar demand could undermine any direct intervention’s effectiveness.

Internal Disputes: Feasibility Doubts and Lack of Consensus

Although the plan has entered government discussions, Reuters citing three informed officials says there is no consensus on its feasibility.

One insider said, “I personally doubt whether Japan acting alone would make any difference.” This highlights the core weakness of the plan—without international coordination, a single country’s futures market intervention may not be able to shake the global pricing system, raising fundamental doubts.

Details on implementation remain unclear—such as which international platform Japan would choose to intervene on. Candidates include the New York Mercantile Exchange (NYMEX) for WTI crude futures, the Intercontinental Exchange (ICE) for Brent crude, and Dubai Futures Market as the Asian benchmark. According to a second insider, similar to forex interventions, operations could be conducted on any platform.

Additionally, the plan faces potential financial risks: if oil prices continue to rise, large short positions could lead to substantial losses. Japan’s recent forex interventions in 2024 have each consumed over $10 billion in reserves.

Analysts: Limited Effectiveness, Key Depends on Physical Supply and International Cooperation

Market analysts generally remain cautious about the actual impact of this plan, believing that financial tools alone cannot fundamentally address physical energy shocks.

Yuriy Humber, CEO of Tokyo-based Yuri Group, said, “The government’s strategy is likely just to suppress short-term volatility, not more. Using financial means to solve physical oil shocks is impossible.” He further pointed out that for intervention to have a real impact, it must be coordinated with actual crude oil inflows, ideally through international cooperation.

Tony Sycamore, a market analyst at IG in Sydney, estimates that Japan would need to invest at least $10-20 billion for the intervention to be noticeable in the market. He bluntly stated, “Whether Japan acts alone or with others, I think it’s pointless. The key to solving the problem is reopening the Strait of Hormuz.”

On the international coordination front, a senior White House official said on March 5 that the US is considering potential actions involving crude oil futures markets but had not made a final decision at that time.

Previously, Japan coordinated with the International Energy Agency and separately released part of its oil reserves to mitigate supply disruptions for end-users. If this futures market intervention proceeds, it would be an escalation of those measures.

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