Japan reportedly considers shorting crude oil to rescue the yen, prompting global analysts to collectively question the move.

As news about the “Japanese government considering shorting in the crude oil futures market to intervene in the currency market” continues to ferment, global analysts are expressing confusion, skepticism, and bearish views on this unconventional idea.

As background, starting this Monday, reports emerged that due to the diminishing effectiveness of conventional intervention tools in tackling stubborn inflation pressures, Japan is weighing directly using foreign exchange reserves to short in the crude oil market to suppress oil prices, thereby indirectly easing the yen’s depreciation pressure.

Subsequently, Japanese Finance Minister Shōzō Katō’s comments on Tuesday made the market realize that Japan seems to be seriously considering this move. Katō stated that concerns about “speculative trading” in crude oil futures affecting the foreign exchange market have arisen, and the Japanese government is prepared to “take all possible measures in all areas.”

According to informed sources, Japan’s Ministry of Finance has already contacted major banks operating in Tokyo’s oil trading sector to inquire about their views on intervening in crude oil futures.

How do oil prices and the yen move together?

Since Japan’s crude oil consumption is almost entirely imported, with over 90% usually sourced from the Middle East, when energy costs suddenly rise, Japan needs more US dollars to buy oil, putting downward pressure on the yen.

Since the resumption of conflict between the US, Israel, and Iran on February 28, Brent crude has jumped from $70 per barrel to $100, with a peak near $120. The USD/JPY exchange rate has also risen from around 155 to about 160.

(Brent crude, USD/JPY daily chart, Source: TradingView)

More importantly, reaching 160 in USD/JPY is seen as a key point for the Japanese government to intervene in the currency market. The last time Japan intervened was between April and May 2024, when the yen fell below 160. At that time, Japan spent 5.9 trillion yen (about $37 billion).

(USD/JPY weekly chart, Source: TradingView)

Therefore, whether or not they short the oil market, Japan is now at a critical point where “saving the exchange rate” is urgent. Japanese law allows the use of foreign exchange reserves for futures market interventions, provided they are used to stabilize the yen.

Does this approach work?

It is currently unclear which platform Japan plans to operate on, but informed sources say that, like currency interventions, such actions could be carried out on any platform, including the NYMEX for WTI crude futures, ICE for Brent crude futures, or Dubai Futures for Asian benchmark oil prices.

Proponents of this innovative approach argue that the futures and derivatives market, which far exceeds physical supply (“paper oil market”), is enormous. This means that even indirect intervention measures could potentially have a real impact.

Opposition voices focus on two points: first, the root cause of this round of crude oil surge is the Middle East conflict, not disorderly speculation in derivatives; second, Japan acting alone to short oil seems unlikely to be effective.

Yuriy Humber, CEO of Tokyo-based consulting firm Yuri Group, bluntly states, “Using financial means to resolve physical oil shocks is impossible.” If officials want interventions to have an impact, they must be synchronized with actual oil inflows. Ideally, this should be an international effort.

Sydney-based IG analyst Tony Sycamore believes Japan might need to spend at least $10-20 billion to see any effect in the market. Sycamore said, “Whether Japan acts alone or with other countries, I think it’s pointless. The key is opening the Strait of Hormuz.”

The US government, which previously considered intervening in crude oil futures, seems to have completely ruled out this option. US Treasury Secretary Janet Yellen stated in mid-March: “We will definitely not do that.”

Meanwhile, the opaque Middle East conflict also makes shorting oil inherently risky. If Japan builds positions and oil prices further surge, they could face huge losses with no help to the yen, worsening the pain from rising energy import costs.

Daisaku Ueno, chief FX strategist at Mitsubishi UFJ Morgan Stanley Securities, also said that if foreign exchange reserves are significantly depleted through large-scale intervention, the general government account could also come under pressure.

As for why they are not simply selling dollars and buying yen—a common approach—there are speculations that Japanese authorities might have “unspoken concerns.”

Ueno commented that this might lead to speculation that “the Japanese government is unable to sell dollars, which is why they are considering other measures.”

(Source: Caixin)