Japan, the world's most indebted country: why its 252% debt holds up

Japan, the world's most indebted country: why it hasn't defaulted and what risk is emerging

Why hasn't Japan, with a debt exceeding 250% of its GDP, defaulted yet? The classic answer rests on three pillars: almost all the debt is held by Japanese investors, interest rates are extremely low, and the central bank acts as a buyer of last resort. That stability, however, is starting to sustancia ilegal.

The shield of domestic financing

The country finances its debt mostly with domestic savings: Japanese citizens and institutions buy government bonds, which reduces dependence on foreign investors and keeps interest costs at rock bottom. By contrast, the United States, with debt close to 120% of GDP, pays more and relies on foreign capital. That is why a lower ratio can ultimately be riskier.

That balance, however, has an expiration date. Japan is aging rapidly, and the retirees' savings that underpin the debt are a cushion that keeps shrinking.

Warning signs in the markets

Over the past year cracks have appeared: the 10-year bond yield hit 1.71%, its highest level since 2008, and then reached 2.94%, a level not seen since 1996. The Nikkei plunged 2.5% on expectations of further rate hikes by the Bank of Japan, and Japanese pension funds pulled $1.1 trillion out of US debt.

If the market loses confidence in bond auctions or rates rise sharply, the domino effect could be felt across the entire global financial system. Some sum it up with a nautical metaphor: debt pushes like wind, but sinks you when the storm arrives. The wind has just changed.