The European sovereign debt crisis may get all of the attention these days. But there’s one country that looks much worse than any of the PIIGS:
Japan
Once an economic powerhouse and affectionately known as Japan, Inc. in the 1980s, the island nation has slowly deflated over two painful “Lost Decades”.
Now the country has amassed more government debt as a percentage of its economic output than any other developed nation in the world. And with a perpetually struggling economy and rapidly aging population, Japan looks like a ticking time bomb.
- Debt to GDP: 220%
- Current Year Deficit to GDP: -8.2% (Italy: -4.6%)
- Median Age: 44.8 years (World: 28.4 years, US: 36.9)
- Population Growth: -0.1%
Even with its rock-bottom interest rates, over half of all its tax revenue now goes to servicing its debt. And if interest rates start to rise, this will only consume a larger portion of the budget.
And don’t expect Japan to grow its way out of this problem anytime soon. The country saw its economy contract more than expected in Q4, with GDP falling an annualized 2.3%.
Japan’s saving grace thus far has been that fact that over 90% of its debt is held by its citizens. But is this a matter of patriotism, or is it just that Japanese citizens cannot earn a decent return elsewhere (savings accounts, stocks, real estate)?
And as the population continues to age, and more and more citizens begin to draw down their savings, who’s going to step in and buy JGBs then, especially at such low rates?
In a recent article by Reuters, an unnamed senior government official in Japan was quoted as saying “It’s scary when you think what could happen if there’s triple-selling of bonds, stocks and the yen. The chance of this happening is bigger than markets think.”
Do you believe Japan will be the next sovereign debt crisis? And if so, what implications will that have on the global markets?
