There are two partly competing explanations for the unrest in the Japanese capital market, which is having an international impact.
The first explanation points to a conflict between speculators and the Bank of Japan.
Investors and hedge funds suspect that the central bank cannot elude the global trend towards higher interest rates for much longer.
The bank countered with record purchases of Japanese government bonds to keep long-term interest rates low.
With an indignant undertone, the Bank of Japan announced that speculators and hedge funds were only out for short-term gains.
But that is the job of speculators in a market economy.
They use their own money to test assumptions about the markets and thus help to identify and correct imbalances.
The second statement emphasizes that the Bank of Japan has maneuvered itself into a corner and is trying to get out without losing face.
This statement fits the imminent farewell of central bank governor Haruhiko Kuroda, who one can assume does not want to leave the bank standing in a corner.
What speaks even more for this explanation is that the central bank is spiraling into intervention in an attempt to steer long-term interest rates.
The central bank subsidizes the banks
The bank is buying government bonds, for more than 34 trillion yen or 245 billion euros since December alone.
With the enormous volume, it destroys regular bond trading because it dominates individual segments and dries up the market.
This puts a strain on banks and insurers, among other things, and also leads to growth-damaging distortions in the corporate bond market.
To mitigate this damage, the central bank is lending government bonds to the banks, most recently worth around 8.6 trillion yen (62 billion euros), so that trade can still run reasonably.
In times like these, even that is no longer enough because investors are opting for higher interest rates and no longer want to bear the risk of falling bond prices.
So the central bank continues the spiral.
Now she wants to lend the financial institutions money for up to ten years at low interest rates so that they can buy government bonds and lower interest rates.
So the central bank is subsidizing the banks to increase demand for bonds, which is so low because the central bank is so aggressive in the market.
This no longer has much to do with the market economy.
Exercise in contortions
The Bank of Japan is practicing these contortions because it does not want to let go of the low interest rates at the long end.
A 10-year interest rate near zero percent is at the core of the yield curve control that will be part of Kuroda's legacy.
Most recently, the ten-year interest rate was around 0.4 percent.
This underscores Japan's special role when American Treasuries yield 3.4 percent.
However, the central bank believes the economy is too weak to withstand even slightly higher interest rates.
Demand is also too weak to drive inflation in the long term.
But the inflation rate is around 4 percent – the highest it has been in forty years.
Day in and day out people experience price increases that they are not used to.
That dampens consumption.
Still, the central bank expects the economy to expand by more than 1 percent through 2024, well above potential.
This points to some building price pressure.
So far, however, the central bank has viewed the inflation as a result of rising energy and food prices as temporary.
The American Federal Reserve and the European Central Bank were wrong about this.
Japan's central bank and government are hoping and demanding substantial wage increases from trade unions and employers in order to boost domestic demand and price increases and to get the population used to an inflationary environment.
This attempt to re-educate people also has nothing to do with a free market economy.
For all his talk of a "new capitalism," Prime Minister Fumio Kishida is following in the footsteps of his predecessor, Shinzo Abe, who once put Kuroda at the helm of the Bank of Japan.
Ten years later, the argument hasn't changed.
Kuroda's intervention in the capital markets is even more curious and disruptive than before.
It's time for Japan to break away from the demand-side fantasies of the Abe Kuroda era and start