Japan flagJapan has been piling up debt for years. Over two decades, the government of the world's second-largest economy has borrowed staggering sums of money to fund domestic stimulus spending. Much of the spending has produced public goods of questionable value, the Japanese equivalents of "bridges to nowhere."

This profligate borrowing has left the island nation with ratio of debt to gross domestic product (GDP) nearing 200%, almost double that of troubled Greece (113%).

Japan's government debt has more than tripled since 1992, and that doesn't include local government borrowing, the equivalent of state and county municipal bonds in the U.S.

How has Japan been able to sustain a debt load that would have crushed other economies long ago?

Saving -- and Retiring

The answer lies in a dynamic few nations share: a populace which saved an extraordinarily large percentage of its income, and then invested those savings in its own government's debt. More than 90% of Japan's government bonds are owned by its people.

In effect, Japan's soaring debt was self-funded. As long as the Japanese people saved trillions of yen and handed them to their government for 1% interest, then the government had a cheap and seemingly limitless supply of low-cost money to tap.

But demographics are finally putting the squeeze on this arrangement. As Japan's population ages, the nation's savings rate is plummeting. A recent report from the McKinsey Global Institute summed the situation up succinctly: Japan: The World's Savers Retire.

The consequences are visible in this chart, which shows that Japan's savings rate is slowly dropping to zero.

Why is the savings rate falling so dramatically? As workers retire, they stop saving as their income declines in retirement. They need cash to live and cover the costs of aging -- additional health care, home care, etc. -- so they sell their investments (often Japanese government bonds) to raise cash. This puts double pressure on bonds: buying dries up and selling accelerates.

Japan Faces a New Reality

The net result of this demographic trend toward lower savings means Japan's government must soon start competing on the world market for capital. In other words, it must start selling its bonds to international investors since its own savings will no longer be substantial enough to fund its enormous debt.

For two decades, Japan's fiscal policy has operated on the assumption that the government can always borrow money at very low interest rates. But as domestic demand for government bonds declines, the government will have to raise interest rates to attract buyers.

Currently, Japanese ten-year Treasuries currently yield 1.3%, compared to U.S. bonds yielding 3.5% or German bonds offering 3%. Facing international competition for capital, Japan will have little choice but to double or even triple the interest rate paid on its bonds. This jump in servicing costs will place impossible pressures on the nation's budget, as roughly 40% of all tax revenues have long gone to paying interest on Japan's ballooning debt.

Global Implications

The consequences of Japan's declining savings rate and the necessity of paying higher interest rates will not stay bottled up in Japan. As the second-largest holder of U.S. government debt behind China, Japan may decide to start selling some of its hundreds of billions of dollars in U.S. Treasuries. That would put pressure on the U.S. Treasury, which already must sell $1.5 trillion in new bonds every year, in addition to rolling over hundreds of billions in bonds which mature.

As Japan's need to sell bonds on the global market increases, the world may see an increasingly desperate competition for global capital arise, as all nations seeking to fund their sovereign debt must raise the yield (the interest rate) they pay on their bonds. That would dramatically raise the interest costs each government pays annually, further pressuring their other spending priorities.

If Japan's cheap debt balloon finally does pop, the consequences will reverberate throughout the global economy.

Increase your money and finance knowledge from home

Socially Responsible Investing

Invest in companies with a conscience.

View Course »

Investor’s Toolbox

Improve your investing savvy with the right financial toolset.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

Yeah right we can save money and do what Japan did. We can buy our Governments treasuries and wait till they go broke this should buy us some more time.

August 05 2010 at 10:41 AM Report abuse rate up rate down Reply

This demographic reality is also hitting the United States with an older population that will be slowing liqudating their 401k's, and relying more and more on government programs like social security and medicare. Europe also shares this problem. However, in The United States, the cost of maintaining the military,industrial, security complex adds more strain. It will be interesting to see how those old bags amongst the tea-baggers react to the choice between war and Social Security. Nobody cares about a war when less than one percent of the population is in harm's way, but when it affects them and their families it will be a different story. The American Empire won't seem so glorious whne instad of buying their electric wheelchair, their medication, or their hospital bill they have to pay for bullets and bombs. It couldn't happen to better people.

August 05 2010 at 8:10 AM Report abuse rate up rate down Reply

ps...my son lives and works in Japan and he has to keep his passport and visa on his person at all times. and no one singles him out. only if he commits a crime. that's how you do legal immigration...

August 05 2010 at 8:05 AM Report abuse +3 rate up rate down Reply
1 reply to scottee's comment

I live in Japan and that is not true. You must keep your green card (to work) and your emmigration card but not your passport and visa. It is very wrong to carry your passport and visa - they could be easily lost.

August 05 2010 at 11:14 AM Report abuse rate up rate down Reply

high domestic savings rate? that's a good idea! that's what we all need!

August 05 2010 at 7:59 AM Report abuse rate up rate down Reply

Debt is the controlling weapon used by the elite. Why does anyone write about anything else. Slaves by conscent - watch it on youtube.

August 05 2010 at 7:32 AM Report abuse +2 rate up rate down Reply

here we go AGAIN! More AOL DOOMSDAY articles. If there is a nut case out there that has an disastrous story to tell, it will be on AOL. This place has become nothing more than a rag sheet Nat'l Inquirer type reporting. The sky is falling, the sky is falling. More Rightwingnut articles to scare the hell outta people....and I'm SURE it's all that Black President's fault. Rascism is alive an well in the USA thank you very much.

August 05 2010 at 6:58 AM Report abuse -6 rate up rate down Reply
1 reply to Bob's comment

yea i think your the nut or a propaganda agent for the goverment

August 10 2010 at 7:51 PM Report abuse rate up rate down Reply
dc walker

Japan use to be our China. We use to buy everything from them. When our corporations were allowed into China and made goods even cheaper, Japan lost their job numbers. Just like when we dropped tariffs allowing our corporations to leave and bring back the goods duty free. We lost jobs, income taxes, state, local and federal, state and local taxes, union wages, retirement plans, health care fees, etc. Up the tariffs, protect our markets.

August 05 2010 at 6:54 AM Report abuse +4 rate up rate down Reply

Neither the Democrats, nor the Republicans, have the answer. The Japanese don't have the answer, either. The Germans don't have the ultimate answer, although they have been doing better. God only knows, what the solution is... Hopefully, people will be willing to cooperate, forgive debts, volunteer their services and donate what they are able to. Faith is the key component that can resolve the global economic crisis. Short-cuts (faster printers, at the federal reserve), gimmicks and short-sighted "solutions," will result in the age-old, art of war.

August 05 2010 at 2:39 AM Report abuse +1 rate up rate down Reply
4 replies to MSmailbox's comment

the republican majority '96 til start of 2007 and the Bush administration spent plenty (tripled government) not to forget the war(s). i get a kick out of the spenders that have turned into deficit hawks.......pathetic.

August 05 2010 at 1:21 AM Report abuse +2 rate up rate down Reply
2 replies to kafienkarl's comment

kafenkarl---yourself, like the obama administration, continue to blame Bush for the demise the U.S.A is in---but--obama HAS SPENT MORE MONEY IN his FIRST 6 MONTHS IN OFFICE THAN THE PREVIOUS 43 PRESIDENTS COMBINED--so--let's continue to blame someone else for obama's spending spree----LIKE pelosi SAYS --LETS PASS THE HEALTHCARE BILL THEN READ IT AND SEE WHAT IT SAYS---getting the U.S.A. back on track will require the present administration to shoulder the blame for their spending tactics, if this country is going to recover--I say, every incumbant should be retired to the couch in November-----

August 05 2010 at 5:50 AM Report abuse +1 rate up rate down Reply

Curt, You are an idiot. Obama hasn't spent anywhere near what Bush has spent let alone all of the presidents. Quit listening to Limbaugh, Fox, Hannity, Beck. Actually, just try applying a little common sense. He would have had to start dozens of wars and eliminate the income tax to even half approach what you claim. You people amaze me. If you don't start dpoing a little thinking for yourself this country is going to go to hell in a handcart. Its one thing to not like the President, but at least try to have some rational reasoning for it.

August 05 2010 at 8:52 AM Report abuse +1 rate up rate down Reply

Obama can see some of the problems arrising, yet he continues to spend us into
oblivian. We're going to be in bad shape after Obama gets through with the

August 04 2010 at 11:33 PM Report abuse +4 rate up rate down Reply
1 reply to tomgold125's comment

more spending and debt is NOT the solution to a spending and debt problem.
we need smaller government and fewer taxes...but how?

August 05 2010 at 8:01 AM Report abuse rate up rate down Reply