It was exactly one month ago - on March 24 - when we first laid out the big dilemma facing the Bank of Japan, which on one hand was hoping to avoid a currency collapse (for obvious reasons) and prevent a crash in the yen, while on the other hand, was also hoping to keep the 10Y yield below its extremely dovish 0.25% yield curve control rate ceiling. The problem is that while the BOJ can control one or the other, it can't control both; this is what we said then:
Japan, that paragon of MMT crackpots everywhere, suddenly finds itself trapped in a lose-lose dilemma: intervene in the bond market and spark a furious, potentially destabilizing and uncontrolled plunge in the yen which would also lead to galloping (if not worse) inflation, which could collapse what little faith remains in the BOJ, or do nothing and contain the slump in the yen while risking far higher yields which in a country where the debt is orders of magnitude greater than GDP, could also spell fiscal and monetary doom.
As a result, the market - having long gotten used to amicable interventions from the BOJ - will now surely test one of these two outcomes, and how the BOJ responds could have dramatic consequences for this original MMT test case. Should the BOJ's reaction spark further erosion of faith in either Japan's fiscal or monetary policies, the outcome for the world's most indebted nation would be disastrous.
A few days later, SocGen's permaskeptic (he is not big a fan of the word "permabear") Albert Edwards picked up on this line of thought and in an extensive note laying out his thoughts on Japan's "lose-lose dilemma", added a new twist, namely that as the yen implodes, China - whose currency has been surprisingly strong even as its economy has hit a brick wall - will follow suit and devalue its own currency.