At the edge of a very, very dark cloud, Japan can count at least two silver linings: Citizens who are willing to save and a central bank that is willing to spend

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Rebuilding northern Japan from the swath of devastation wrought by last week's quakes and tsunamis will cost the Japanese government tens of billions of dollars. Japan already has the world's highest debt to GDP ratio, at 200 percent -- more than three times the United States' burden. Washington is already concerned about the U.S. tip-toeing toward a debt crisis with far less red ink on our shoulders. What makes Japan so different?
The Money Report
One reason is that Japan owes most of its debt to Japanese families and businesses, who have been willing to plow their savings into government bonds. The U.S. borrows about half our debt from overseas, which means we pay higher rates decided by the more cutthroat international bond market.

The upshot: So long as Japan borrows from willing domestic investors, it can afford to shoulder the world's greatest debt burden.

Even if the Yen weathers this storm, Japan can't expect to hold debt worth twice its GDP forever. High savings were sustainable when the population was younger, wealthy, and growing. Instead, Japan is old, stagnant and saving less every year. That investors have repeatedly failed to short Japanese debt since the early 1990s doesn't mean that Japanese debt is a good bet tomorrow. The country will eventually find itself in a financial catastrophe when the public stops lending money at floor-scraping 1.5 percent rates. Consider this alarming fact: If its interest rates doubled to 3 percent, interest payments would suddenly consume half of government revenue.

This disaster will expand Japan's debt to GDP ratio by pulling on both ends. Debt will rise as Tokyo borrows $100 billion or so to rebuild, and GDP will shrink. As Time's Curious Capitalist explains, the disaster has caused factory shutdowns, from paper mills to beer breweries to chip foundries. Toyota has suspended all auto production through March 16, and "production disruptions in Japan could cause shortages of key components, especially in the consumer electronics industry, since the economy is a core part of the world's manufacturing supply network."

At the edge of a very, very dark cloud, Japan can count on at least two silver linings. First, it will not struggle to pay for the clean-up, thanks to significant national wealth, advanced technology, and willing lenders throughout Japan. Second, the country controls its own currency, which has allowed it to plow $180 billion into equity markets to support the economy. Unlike Europe's debt-riddled nations, Japan can rely on cheap borrowing and aggressive monetary stimulus to support this recovery.

Image: Mainichi Shimbun/Reuters

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