Japan is highly dependent on imported oil, which means that fluctuations in crude oil prices can quickly affect its currency and trade balance. As the Middle East war has pushed up energy costs and threatened the global economy, the Japanese government has hinted that it might intervene in the oil market to indirectly support the weakening yen.
Trading oil futures to support the yen is a novel approach for Japan and the latest attempt by the Japanese government to adjust its intervention strategy in response to speculators. Governments rarely directly intervene in the energy derivatives market, but Japanese Finance Minister Masako Shigemoto said she was concerned that speculative trading in oil futures was affecting the foreign exchange market. She said the government was ready to take “all possible measures in all aspects”.
Almost all of Japan’s oil consumption relies on imports, with over 90% of its oil typically coming from the Middle East. Since late February, disruptions in oil supplies from the Persian Gulf and the rise in benchmark crude oil prices have pushed up the costs of fuel, electricity and food. The Japanese economy is at risk of being hit, and the government has begun to draw on its 80 million barrels of national oil reserves.
When energy costs rise, Japan needs more dollars to pay for imports, which will put downward pressure on the yen and exacerbate inflation. In the short term, speculators can bet on the movements of oil prices and the yen, thereby intensifying market volatility. If Japan can curb crude oil prices, it might be able to relieve the pressure on the yen by reducing the number of speculators. Since the outbreak of the conflict in Iran, the yen has weakened significantly against the US dollar.
Those who support government intervention believe that the sheer size of the so-called paper oil market (futures and derivatives trading, far exceeding physical supply) could make such actions effective, even if the impact is indirect.
The government can intervene in the market in various ways. The key lies in finding a method that can maximize influence while minimizing potential costs. One option is to short sell oil – that is, to sell futures contracts to depress the current benchmark price – and gradually close out positions in small increments over time. Position limits can restrict the number of transactions in a single contract month, and by spreading the intervention across the entire futures curve, concentrated trading can be avoided.
Any transaction could be carried out through financial institutions, just like regular foreign exchange market intervention. According to informed sources, the Ministry of Finance of Japan has contacted several major banks in Tokyo that have oil trading businesses to seek their opinions on intervening in crude oil futures.
Technical analysis:
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Gold: The price broke through the key support area of 4430/4450 overnight and is currently retracing to confirm this area. If it is resisted here during the day, it may sweep below the liquidity at 4350; if the price can hold above 4450, the short-term rebound target is 4480. For detailed positions, please consult the plugin.
(Gold 15-minute chart)
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The Nasdaq: After three days of consolidation, the price has returned to the vicinity of the breakout point on Monday. Due to the uncertainty of the Iran deal in the short term, we suggest taking a wait-and-see approach for now. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
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Crude oil: Yesterday, our plugin reminded us to pay attention to the pullback after the price swept the yellow area. So far, it seems to have worked well. Today, we only focus on whether the price will break down and trigger a second test of the overnight low. If an upward breakout occurs, we suggest waiting and seeing for the time being. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
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Today’s key financial data and events to focus on:
15:00 UK February seasonally adjusted retail sales
22:00 US University of Michigan Consumer Sentiment Index for March
22:00 The final reading of the University of Michigan’s one-year inflation expectation for March in the United States
