We all know about how badly indebted the Greek government is. With its national debt at 115% of GDP, everyone sees Greece as a basket case.

If Greece is a basket case, what about the world?s second largest economy, Japan? It?s national debt is fast approaching 200% of GDP this year. It all began in the 1990s, as we wrote in Are governments mad with ?stimulating??,

In the 1990s, when the Japanese bubble economy burst and fell into debt deflation, its banks were crippled with bad debts. In the ensuing decade, the Japanese government embarked on massive government stimulus programs. Roads to nowhere were built and there were even comments about resorting to military spending (which of course was dismissed later as mere rhetoric because of neighbouring countries? sensitivities to Japan?s wartime past). When the first stimulus programs proved to have failed in its objective, a second and bigger one was announced. When that failed too, a third and bigger one was announced. Altogether, the Japanese government had embarked on 10 stimulus programs totalling 30 trillion yen.

For Japan, they are a nation of mighty savers. More than 90% of their government debt are owned by their citizens at pathetically low interest rates. That is the reason why the purchasing power of the yen had not gone down the drain- the Japanese government?s spendthrift ways are financed by the savings of its people.

But now, Japan is facing a problem. It?s population is aging fast and more and more retired/elderly Japanese need access to their savings (that they generously loaned to their government) as they leave the workforce. As this Bloomberg article reported,

?Japan?s inability to finance its debt sales domestically is approaching,? Kusano said. ?And when that time comes, you can?t expect foreign investors to accept Japanese debt with such a low coupon of 1.2-1.3 percent.?

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?If bond yields spike, Japanese financial institutions will take a heavy blow, shaking the nation?s financial system,? Kusano said.

We do not know when the financial wolf packs will turn their eyes on Japan. But you can be sure that hell will break lose when it happens, because Japan is the world?s second largest economy.