Think America's Debt is Bad? Japan's is 1,000,000,000,000,000

Impact

President Obama has taken a lot of heat for America's soaring debt, which amounts to nearly $17 trillion over the past decade. But in Japan, the federal debt has gotten so bad, it has reportedly reached one quadrillion yen — a figure with 15 zeros.

Admittedly, when converted to yen, the U.S. debt is 1.5 quadrillion. But this sum is still much less severe a portion of national GDP and tax revenue spending than is that of Japan. The per capita impact of the Japanese debt is as dire as the word quadrillion indicates, as are the potential repercussions that it will have on the future of the nation’s economy.

By the end of 2013, Japan’s debt is expected to exceed 247% of GDP, and the Japanese government already forfeits nearly 50% of its annual tax revenue to debt services. When private and corporate debt is included in the equation, Japanese debt amounts to almost 500% of GDP.

Japan clearly faces a steep uphill climb in reducing its debt. Because the global ramifications of a Japanese debt-default would be both agonizing and enduring, the nation’s government is seeking to tackle the issue by means of inflation. By the end of next year, the Japanese government plans to flood at least 60 trillion yen into its market in order to purchase its own bonds. This sum will double Japan's monetary base.

Another key piece to the Japanese federal bank’s plan is to maintain low interest rates to limit the severity of their future interest payments. Maintaining low interest rates is also key to preventing panic and encouraging investment in the private sector. But it is virtually impossible to lower them any further than they are now – today’s yield on a 10-year Japanese bond is a mere .76%. The Japanese government must monitor an increasingly fragile marketplace to prevent interest rates from spiking, and thus disrupting the sanity of its economy and undermining any debt-reducing progress that might be achieved by inflation.

And the Japanese government unfortunately must deal with many other factors contributing to interest rates than just the private sector. Any decrease in federal monetary input in any of the world's major economies — the United States, the European Union, China — would assist in raising Japanese interest rates.

The Japanese 10-year treasury bond yield only needs to reach 2% for debt services to consume 80% of the nation's tax revenue, effectively increasing the likelihood of default.

Japan won’t be able to simply inflate itself out of crippling debt — too many stars would have to align too perfectly. Nevertheless, much can be done both by the federal bank in Japan and by the international community to mollify the impact of the pending Japanese economic slump. Japan’s economy is large and global enough to demand the concern of investors and governments everywhere, and the nation's fragile interest rates must be monitored as something of a ticking time bomb.