In the United States, deficit hawks see our public debt growing to 70 percent of the size of our economy and warn about a fiscal collapse. On the other side of the globe, however, Japan's debt has steadily grown to 200 percent of its GDP. How is that country still standing?
One big reason is that Japan owes the debt to itself, whereas we borrow half our debt from overseas. Japanese families and businesses have been willing to plow their savings into Japanese bonds, which keeps interest rates much lower than they would be if Japan relied on the international bond market, like the United States.
In a smart essay on the (small but present) likelihood of a full-scape Japanese collapse, Slate's Bethany McLean reveals this stunning fact:
And as deflation struck the Japanese economy, the interest rate on its outstanding debt has fallen to an average of a mere 1.5 percent ... If Japan's interest rates merely doubled, from 1.5 percent to 3 percent, then interest expense would be more than half of the government's tax revenues.
This wouldn't be a big deal if Japan's population was young, growing, and looking to save. Instead, Japan is old, stagnant and saving less and less every year. So who's going to invest in Japanese debt while its retirees are drawing out savings while its younger working-age generation is small and spending money instead of parking it in government bonds?
McLean offers some answers in Slate.