JAPAN’S ECONOMY IS IN THE WORST POSSIBLE SITUATION.
No matter what it does, it could be a disaster for the economy.
If it raises rates, Japanese bond yields can move even higher, putting more pressure on banks, insurers, and huge portfolios of old low-yield bonds.
It also makes borrowing yen more expensive, increasing the risk of another yen carry-trade unwind and forced selling across global markets.
But keeping rates too low creates another problem.
The yen can remain weak, imports become more expensive, and inflation pressure can stay high.
In that case, Japan may then be forced to spend billions more defending its currency.
So Japan is stuck between two difficult choices:
Raise rates and risk financial stress.
Keep rates low and risk an even weaker yen and more inflation.
And whatever Japan chooses is going to create havoc.
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