Japan is going against the norm and instead focusing on oil to support the yen exchange rate.

Sources say Japan is considering a controversial plan to curb the depreciation of the yen: intervening in the oil futures market, as traditional policy tools have had little effect on stubborn inflationary pressures.

Media reports on Monday stated that the proposal is still under discussion, and specific details are currently sparse, but this idea highlights the growing frustration of the Japanese government. Policymakers increasingly believe that the speculative surge in energy prices is a major driver of the yen’s continued weakness against the dollar, and this issue is beyond the control of monetary easing and verbal intervention.

However, analysts and even some government officials question whether this strategy can have a tangible effect on curbing the current weakness of the yen. They generally believe that the yen’s weakness is primarily due to the strength of the dollar rather than speculative short selling of the yen.

Shota Yanagisawa, a foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, stated, “The government is certainly aware that this impact will inevitably be temporary. They are likely doing this mainly to buy time while waiting for the situation in the Middle East to improve.”

Unconventional Shift

Market insiders revealed to Reuters that, as the Middle East crisis pushes up energy prices, the Japanese government is considering intervening in the crude oil futures market.

According to the proposal, Japan would utilize its $1.4 trillion foreign exchange reserves to establish short positions in the crude oil futures market, selling futures contracts to drive down oil prices.

By reducing the dollar demand generated by oil purchases, the Japanese government can alleviate the selling pressure on the yen. Recently, oil futures have been linked to foreign exchange market trends, with the Middle East conflict driving up oil prices while simultaneously increasing the market’s demand for the dollar as a safe haven.

Japanese law stipulates that if the purpose is to stabilize the yen, foreign exchange reserves designated for direct market intervention can be used to position in the futures market.

Three informed government officials disclosed that discussions about this proposal are ongoing within the government, but consensus on its feasibility has not yet been reached.

One official remarked, “I personally doubt how much significance unilateral action by Japan can have.” He expressed skepticism about whether this move could achieve significant results without joint action from other countries.

Japan is considering this unconventional measure because policymakers privately worry that, in the current environment, traditional yen-buying interventions may be futile. If the Middle East conflict continues, demand for the dollar may further surge, potentially offsetting any effects of currency market interventions.

Recent statements from Japanese government officials have indicated a tactical shift.

Finance Minister Shunichi Suzuki did not warn against speculative trading in the foreign exchange market on Tuesday, but instead blamed speculative actions in the oil futures market for disrupting the foreign exchange market.

She stated, “The Japanese government is determined to take thorough action at any time and in all aspects.” This statement suggests that as the yen approaches the key psychological level of 160, the government may adopt more innovative measures to support the yen.

What are the effects?

It is currently unclear at which international platform Japan would intervene—whether in the New York Mercantile Exchange (NYMEX) trading WTI crude oil futures, the Intercontinental Exchange (ICE) trading Brent crude, or the Dubai futures market as the Asian benchmark.

Another source indicated that, similar to currency market interventions, such operations could take place on any platform.

Previously, Japan had cooperated with the International Energy Agency and made its own decision to partially release oil reserves to alleviate supply disruptions that had begun to impact end-users.

However, analysts remain skeptical about whether this move will be effective.

Yuri Hember, CEO of Tokyo consulting firm Yuri Group, stated, “The government’s strategy is mostly just to smooth out short-term fluctuations. Financial measures cannot fundamentally resolve the tangible oil supply shock.”

“If officials want the intervention to be effective, they must coordinate with actual oil supply entering the market, ideally through a multilateral action.”

On March 5, a senior White House official stated that the United States, a key ally of Japan in defense, exchange rates, and energy security, is considering potential actions involving the oil futures market.

However, at that time, the U.S. had not yet made a final decision. The U.S. Treasury did not respond to Reuters’ request for comment.

If oil prices continue to rise, holding a large number of short positions could also result in potential losses.

In the most recent round of currency market interventions in 2024, Japan consumed over $10 billion in foreign exchange reserves with each operation.

Sydney IG market analyst Tony Sycamore believes that Japan would need to invest at least $10 billion to $20 billion for the effects to be seen.

He stated, “Whether Japan acts alone or in conjunction with other countries, I believe this move is completely meaningless. The key to the whole matter is the restoration of navigation in the Strait of Hormuz.”