Japan wants to defend the Yen from sinking further and maintain its interest rate cap too. Good luck with that.

Japanese yen chart courtesy of trading economics 

Bank of Japan Blows Record $81 Billion Defending It's No Rate Hike Pledge

Yesterday I reported Bank of Japan Blows Record $81 Billion Defending It's No Rate Hike Pledge

Bank of Japan deploys over 10.94 trillion Yen in an attempt to hold its 10-year interest rate peg to 0.25 percent. 

Firepower?

Do it again.

It has the firepower. It has spent ¥, not US$ (though it also has quite a few of them).

Both BoJ and MoF are proud and stubborn: neither will want to be seen changing policy because of market pressure.

— Kim Driver (@KimDriver11) June 21, 2022

Store of Value?

Possibly. But given inflation differentials and not simply looking at nominal spot and nominal returns (which tend to drive the speculative carry trade until Wily E. Coyote looks down....) the ¥ is doing pretty well as a store of value to its users.

No?

— Kim Driver (@KimDriver11) June 21, 2022

I think either the peg blows or the Yen blows.
 

Japan's Choices 

1. Japan can defend its interest rate line by printing more money but at expense of the yen 

2. Japan can defend the yen by hiking rates or by selling its reserves until reserves run out Japan has a nasty choice 

Japan's choices

1. Japan can defend its interest rate line by printing more money but at expense of the yen

2. Japan can defend the yen by hiking rates or by selling its reserves until reserves run out

Japan has a nasty choice@michaelxpettis am I missing anything? https://t.co/NXDePjaqWV

— Mike "Mish" Shedlock (@MishGEA) June 22, 2022

I received this email reply to the above Tweet from Michael Pettis.

"Looks right. I'd add that by weakening the yen, Japan seems always to support their exporters at the expense of their consumers, which may be why domestic demand is always so weak and growth so sluggish."

The smart thing for Japan would be to hike rates and let the Yen strengthen. 

Instead, if they stay on the same path, the yen might blow up.

All of Japan's efforts to achieve growth by inflation and exports have backfired. One might think that after 40 years they would try something else.

The single worst choice for Japan would be to blow its currency reserves in an attempt to defend both the Yen and its interest rate peg.
 

Japan, China, Germany

Japan, China, and Germany all want to strengthen exports. Trump did too, resorting to tariffs that backfired. 

Mathematically, everyone cannot be an exporter. 

The ECB has a similar problem compounded by a fundamentally flawed euro with no way to fix it. 

ECB's Dilemma

The ECB Has a Huge Dilemma: Price stability or Bail Out Nations

Hello @ECB president Christine @Lagarde, what you gonna do?@dlacalle_IA https://t.co/m2LI3h0f5N

— Mike "Mish" Shedlock (@MishGEA) June 20, 2022

#ECB balance sheet hit another ATH as Lagarde keeps printing press rumbling despite record-high #inflation. Total assets rose by €7bn to €8,827.9bn. ECB balance sheet now equal to 82.4% of #Eurozone's GDP vs Fed's 36.6%, BoE's 39.6%, BoJ's 136.3%. pic.twitter.com/DPPQ0QJmav

— Holger Zschaepitz (@Schuldensuehner) June 21, 2022

Global Distortions

• ECB balance sheet 82.4% of Eurozone's GDP
• Fed's balance sheet 36.6% of GDP
• BOE's balance sheet 39.6% of GDP
• BoJ's balance sheet 136.3%"of GDP

1/8
More trade is generally a good thing for the world economy unless what drives it are policies that achieve "international competitiveness" mainly by directly or indirectly suppressing the working- and middle-class share of production.https://t.co/TNH8Eym0R8

— Michael Pettis (@michaelxpettis) June 22, 2022

Trade Wars are Class Wars

3/8
On the other hand countries in which workers receive a relatively larger share of what they produce (the US, Britain, France, Canada, Italy, Spain) have seen their share of global manufacturing decline.https://t.co/wzdBNB5NRo

— Michael Pettis (@michaelxpettis) June 22, 2022

And if you think China will be a growth savior, with its imploding property bubble and dependence on exports headed into a global recession, think again. 

For more discussion of the Eurozone  please see The ECB Has a Huge Dilemma: Price stability or Bail Out Nations