James Saft

James Saft is a Reuters columnist. The opinions expressed are his own.

Could Japan be the next victim of the crisis of faith in government bonds?

Despite carrying public debt more than twice the size of its economy and suffering from poor growth and an aging population, Japan’s government can still borrow money for 10 years at just over 1 percent.

The big story in global markets, perhaps even in global economics, in 2011 has been the transformation of government debt markets, which are now being driven by the realization that sovereigns can and sometimes do default.

So far that has actually been good for borrowing rates for big economies blessed with their own central banks, such as the U.S., Britain and Japan. There is a growing chance that in 2012 the wolves, having picked off Italy and others in the euro zone, move on to target the hindmost of the rest of the pack, which, given its poor medium-term fundamentals, may well be Japan.

“Recent events in other advanced economies have underscored how quickly market sentiment toward sovereigns with unsustainable fiscal imbalances can shift,” the International Monetary Fund said in a paper released last week on Japan.

In the understated bureaucratese of the IMF, that is the equivalent of shouting a warning from the rooftops.

James Saft is a Reuters columnist. The opinions expressed are his own.

The Bank of Japan seems to be running its own fun-house version of monetary policy, intervening in equity markets when they fall.

Dubbed by traders the BOJ’s “1% rule,” the central bank is apparently stepping in to buy Japanese shares on days when they end the morning down 1 percent or more on the previous day’s closing price.

While the BOJ will not comment on its purchases or policies, Japanese news organization Nikkei points out that since mid-December, the central bank has bought ETFs on each of the 18 days the Topix index fell by at least 1 percent in morning trading.

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala. — With QE2 set to end in five weeks and with Greece rolling downhill towards default, the world is not best placed to withstand a weakening economy.

That, however, is exactly what looks to be happening, as Asian demand is hit by a cooling China and a struggling Japan.

Let’s take a look at the evidence:

Japan’s economy shrank by 0.9 percent in the three months to March, battered by the earthquake, tsunami and ongoing nuclear fiasco.

James Saft is a Reuters columnist. The opinions expressed are his own.

If rebuilding after tragedies is actually good for the global economy, someone clearly forgot to tell investors.

In the days after Japan’s earthquake and tsunami and its still unfolding nuclear disaster, global stock markets have fallen sharply, as have bond yields and even energy prices, all indicators that someone, presumably someone with quite a bit of money, thinks this all will not end well.

While replacing broken windows will flatter GDP, it does not do a whole heck of a lot to increase productive capacity. The contrary argument, of course, is that Japan is suffering from a surfeit of savings and that these funds will finally be given something worthwhile to do in rebuilding.

Markets are busy speculating on which country might follow Egypt on the revolutionary road, but watch out for the impact on a country where bellies are full and the chances of revolt are exactly nil: Japan.

The same inflation in food and energy which fanned discontent in Tunisia and Egypt could badly hit real wages and purchasing power among Japanese citizens, potentially undermining their willingness to hang on to the debt which the government desperately needs them to own.

That’s right, deflation could actually ease in Japan and, that’s right, its demise could help tip the country into the long-awaited financing crisis.