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Coming Crisis to Make Japan’s Lost Decade Look Like a Cake Walk

Japan’s “lost decade” of economic stagnation has been dragging on for nearly a quarter century now, but it may be set to get a lot worse, according to The Atlantic. Forget mere economic stagnation: the danger now is of a full-scale financial collapse fueled by a crushing debt burden.

Like the U.S., Japan has long had access to cheap funds—not, as with America, because of the yen’s status as international currency of choice, but because of a massive aging population whose savings mostly go directly or indirectly into Japanese government debt. And now that the government needs to borrow funds more than ever, the well threatens to run dry:

At some point, Japanese citizens will decide that saving in any yen-­denominated asset is not worth the risk. Then interest rates will rise; the capital position of banks, insurance companies, and pension funds will worsen (because they all hold long-maturing bonds, which fall in value when rates rise); and fears of insolvency will surface.

The shock felt around the world will result not just from the realization that Japan is unable to meet its pension and other social obligations. Investors will also be horrified to see the disappearance of the private savings previously used to buy government debt, whether through debt defaults and bank failures or through high inflation. For ordinary Japanese, public promises about retirement benefits and price stability will be broken just as their private savings for retirement collapse.

Japan is the world’s third largest economy with the second largest financial system. A crisis in the Japanese government debt market would make Greece, Spain and Italy all look like small potatoes.

Unfortunately the root causes of Japan’s problems are common: social insurance programs and entitlements that made sense when lifespans are relatively short and each new generation is larger than the old one no longer make financial sense as lifespans extend and families shrink.

In the US, we still have time for change before the worst becomes inevitable, but so far we seem pretty committed to wasting whatever time we have.

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