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.