In May of this year the unsustainable nature of Japan’s debt caused Fitch to cut its rating to A+ from AA and further downgrades are more than likely.
It’s not merely the size of Japan’s debt that poses a serious threat; it’s also the average maturity. Japan has $11.3 trillion in outstanding sovereign debt (over 990 trillion yen), the majority of which matures in the next 2.5 years. That means that by the end of 2015 Japan will have to find buyers for a total of $5.75 trillion in maturing debt. That’s in addition to around $1.4 trillion that it must borrow to cover its budget deficit over that period.
Japan is also suffering from demographic pressures with its Baby Boomers beginning to retire and draw down on their pension funds, rather than paying into them. As a result Japan’s Government Pension Investment Fund (GPIF) – the largest pension fund in the world – has been forced to begin selling Japanese government bonds (JGBs). This is a major issue since the GPIF owns almost 12% of all outstanding Japanese debt and it now looks as though it will be a net seller. The precarious nature of Japan’s fiscal position makes it all the more likely that the nation will soon run in to funding difficulties. At which point they will have to choose between austerity (and economic contraction), or money printing. However the latter seems much more likely