Japan plans to use foreign exchange reserves to short crude oil to rescue the yen; global analysts question the effectiveness

【Global Times Finance and Business Comprehensive Report】As news keeps gaining traction that the Japanese government is considering shorting the crude oil futures market to intervene in the exchange rate, global analysts have generally expressed confusion, puzzlement, and a negative outlook toward this out-of-the-ordinary idea.

According to Reuters’ March 26 report, the Japanese government is evaluating an unconventional plan—using foreign exchange reserves to directly intervene in the crude oil futures market by establishing short positions to push down oil prices, thereby indirectly easing pressure from the yen’s depreciation. The yen exchange rate is now nearing the psychological level of 160 yen per US dollar. The last time Japanese authorities intervened in the foreign exchange market was during April to May 2024, when they responded to the yen falling below 160.

Japan relies on imports for more than 90% of its crude oil consumption, mainly from the Middle East. When energy costs rise, Japan needs more US dollars to buy crude oil, creating downward pressure on the yen. Since fighting between Israel and Iran reignited on February 28, Brent crude oil has jumped from $70 per barrel to $100, and the US dollar versus the yen has also risen from 155 to around 160.

It is understood that Japanese law allows foreign exchange reserves to be used for futures markets, provided that the operation target is to stabilize the yen.

Market analysts generally take a reserved view of the plan’s real-world effect. Yuri Group, a consulting firm headquartered in Tokyo, Chief Executive Officer Yuriy Humber said bluntly: “It is impossible to use financial means to resolve the shock to physical oil. If officials want the intervention to have an impact, it must be synchronized with the actual inflow of crude oil, and ideally, this should be a coordinated effort at the international level.”

Tony Sycamore, an IG analyst based in Sydney, believes Japan may need to spend at least $10 billion to $20 billion to see results in the market. He said: “No matter whether Japan acts alone or in partnership with other countries, I don’t think this makes any sense at all. The key to everything is to open the Strait of Hormuz.”

Shota Ryu, chief foreign exchange strategy officer at Mitsubishi UFJ Morgan Stanley Securities, said the impact of such intervention “is inevitably temporary,” more of an effort to buy time for improvements in the situation in the Middle East. He also noted that if foreign exchange reserves drop significantly during large-scale intervention, Japan’s general account could also become strained as a result.

The US government, which had considered intervening in the crude oil futures market, appears to have ruled out this option. In mid-March, US Treasury Secretary Bessent made it clear that “we absolutely will not do that.” (Chen Shiyi)