Japan Stuck in Stagflation Quagmire as Yen Plummets

The Japanese economy has been caught in a trap between inflation and recession due to its pro-business government's policies, which have led to stagflation. The government, under Prime Minister Sanai Takaichi, has implemented policies similar to those of Liz Truss in the UK, including cutting taxes and increasing government spending, despite high budget deficits.

Japanese government bond yields have risen sharply to 2.86% in July, its highest level in over 30 years, while the yen has collapsed to near historic lows. The Bank of Japan was forced to intervene by buying yen with dollar reserves, and the US Treasury also started buying yen, helping to stabilize the currency.

The US intervention was motivated by concerns that rising Japanese government bond yields would lead to higher US government borrowing costs and interest rates, which are already at record highs. Additionally, a weak yen would make US exports more difficult to compete in world markets.