Traditional policies failed? Japan is reportedly considering a "bizarre strategy" to reverse the yen's decline by using crude oil futures.

According to informed sources, amid the traditional policy tools being ineffective in tackling stubborn inflation and controlling the weakening of the Japanese yen, Japan is considering a controversial response plan - intervening in the crude oil futures market. The plan is reportedly still in the discussion phase, with few details available at the moment, but it highlights the increasingly anxious attitude of the Japanese government. Policymakers increasingly believe that speculative funds pushing up energy prices are a key driver of the yen's ongoing weakening against the US dollar, and traditional measures such as monetary easing and verbal intervention are no longer effective. However, many analysts and even some Japanese government officials question whether this strategy can effectively reverse the current slump of the yen. The market generally believes that the main reason for the yen's weakness is the strength of the US dollar, not speculative funds shorting the yen. Shota Ryu, a forex strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "The Japanese government must be aware that this move will only have a temporary effect. Its main purpose is likely to buy time until the situation in the Middle East eases." Unconventional measures Market sources confirm that due to the impact of the Middle East crisis on energy prices, the Japanese government is considering intervening in the crude oil futures market. According to the proposed plan, Japan will use its massive foreign exchange reserves of $1.4 trillion to sell contracts in the crude oil futures market to establish short positions, in order to suppress oil prices. By reducing the demand for US dollars needed to buy oil in the market, Japan can relieve the selling pressure on the yen. Recently, movements in the crude oil futures market have been highly correlated with the foreign exchange market: the Middle East conflict has pushed up oil prices, while also boosting safe-haven buying of the US dollar, further pressuring the yen. Japanese law stipulates that foreign exchange reserves, originally intended for direct intervention in the currency market, can be used to open positions in the futures market for the purpose of stabilizing the yen. Three government officials familiar with the discussions on the matter stated that the plan has been under discussion within the government, but consensus has not yet been reached on its feasibility. One official admitted, "I personally doubt that Japan's unilateral actions will be very effective." He believes that without joint action with other countries, Japan's move may not achieve the desired effect. The reason Japan is considering this unconventional measure is because policymakers privately worry that traditional interventions in the forex market to buy yen may be ineffective in the current environment. If the Middle East conflict continues to escalate, the demand for the US dollar may further increase, directly offsetting the effects of market intervention. Japanese government officials have recently hinted at a tactical shift. Japanese Finance Minister Okitsu Katatsuki did not warn against speculative trading in the forex market on Tuesday, but instead pointed directly to the disruptive speculative behavior in the crude oil futures market. She said, "The Japanese government will always do its utmost and take comprehensive measures." These comments suggest that as the yen approaches the key psychological level of 160, Japan may support the yen with more innovative means. Effectiveness questioned It is not yet clear which international platform Japan will choose to intervene in the market: the New York Mercantile Exchange trading WTI crude oil, the Intercontinental Exchange trading Brent crude oil, or the Dubai Futures Exchange serving as the Asian benchmark. Another source said that similar to forex intervention, Japan can carry out relevant operations on any platform. In the past, Japan has cooperated with the International Energy Agency and acted independently, partly releasing its national oil reserves to alleviate the impact of oil supply disruptions on end-users. This futures intervention is a follow-up action. However, analysts generally have doubts about this. Yuriy Humber, CEO of Tokyo consultancy Yuri Group, said, "The primary goal of this strategy by the Japanese government may be to stabilize short-term market fluctuations. However, financial means alone cannot solve the real-world impact of oil supply disruptions." "To make the intervention effective, actual oil supply needs to be brought into the market, preferably through joint action by multiple countries." As a core ally of Japan in defense, forex, and energy security, a senior official from the White House revealed on March 5 that the US is considering related measures involving the crude oil futures market, but no final decision has been made yet. The US Treasury Department has not responded to requests for comment. Furthermore, if oil prices continue to rise, large short positions may bring potential losses to Japan. In the most recent round of forex interventions in 2024, Japan spent over $10 billion in foreign exchange reserves on a single operation. IG market analyst Tony Sycamore believes that Japan will need to invest $10-20 billion to make the intervention effective. "Regardless of whether Japan acts alone or with other countries, I believe this move is completely unreasonable," Sycamore said. "The crux of the problem lies in whether the Strait of Hormuz can resume navigation."