January 28, 2011

Japan’s Credit Rating Cut to AA- by S&P

Graph showing National Debt of Japan from Apri...Image via Wikipedia
Japanese Debt Time Bomb

It's only a matter of time before Japan's debt problem matters in a serious way. However, it's important to note that it's only been a matter of time for the last decade as well.

The key to understanding the urgency now is the warning from Finance Minister Yoshihiko Noda that Japan's debt burden has risen to a point where Japan can’t rely on bond sales to cover revenue shortfalls.

Japan has reached the point where its savers need to draw down their savings in retirement, and thus need to sell Japanese government bonds, not buy them. However, the Japanese government has squandered those savings (and 100% more of GDP as well) building bridges to nowhere fighting deflation.

Nations often default on foreign debt, but this is debt the government owes the Japanese people.

Will Japan embark on a huge austerity program in the midst of deflation? Will Japan simply print the money? If so, what happens to interest rates?

Should those interest rates rise to a mere 3% or so, interest on Japan's national debt will consume most of its revenue.
The crucial question is how long can Japan sustain a debt-to-GDP ratio near 200% with an increasingly aging population and a stagnant economy.
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