TOKYO, March 26 (Reuters) – Japan is weighing a controversial plan to arrest the yen’s slide: stepping into oil futures markets, sources say, as long-standing policy tools lose traction against stubborn inflation pressures.
Details of the proposal remain scant, after Reuters reported on Monday that it was under discussion, but the idea underscores Tokyo’s mounting frustration. Policymakers increasingly see speculative surges in energy prices as a major driver of the yen’s weakness against the dollar – and a problem monetary easing and verbal intervention no longer seem able to contain.
Analysts and even some in the government, however, question whether such a strategy would have any meaningful impact in arresting the yen’s current weakness, which they mostly attribute to dollar strength, rather than speculative yen short-selling.
“The government must be aware that the impact would inevitably be temporary,” Shota Ryu, FX strategist at Mitsubishi UFJ Morgan Stanley Securities, said. “They would likely use it mainly to buy time till the Middle East situation improves.”
UNORTHODOX PIVOT
Market sources have told Reuters Japan’s government is considering intervening in the crude oil futures market as the Middle East crisis drives energy prices up sharply.
Under the scheme, Japan would tap its $1.4-trillion foreign exchange reserves and build short positions in the oil futures market by selling futures contracts to push down prices.
By dampening demand for dollars to buy oil, Tokyo can ease selling pressure on the yen. The oil futures and currency markets have recently moved in tandem, with the Middle East conflict pushing oil prices higher while lifting safe-haven demand for the dollar.
Japanese law allows use of foreign exchange reserves, preserved as a war chest for direct currency-market intervention, to take positions in futures markets if the objective is to stabilise the yen.
The idea is being contemplated within the government, though there is no consensus on its feasibility, said three government sources with knowledge of the deliberations.
“I personally wonder whether it would mean anything if Japan did it on its own,” one of the sources said, casting doubt on whether Tokyo can get much bang for its buck without joint action with other countries.
The unconventional step has emerged as policymakers privately worry that conventional yen-buying intervention could prove futile under current circumstances, as any such action could be blunted by a surge in dollar demand that could intensify if the Middle East conflict drags on.
finance.yahoo.com
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