The Japanese Puzzle Box

Barry Ritholtz has flagged this article from Ambrose Evans-Pritchard as a must-read today, as the Telegraph's international econ reporter reminds us there are bigger problems than America's economic woes, and that's Japan's looming meltdown.

Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".

The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.

"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.

The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.

Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

The notion of Japan going into default, as in Japan the country, the second largest economy out there, should scare the bloody hell out of all of us. Where Japan is now is where America is ultimately headed, but should another world-breaker of a crisis hit, it will hit here.

And it will hit here soon. New tag, Japan. Definitely going to keep an eye on this one. Japanese deflation may be the time bomb that blows the world to bits.