Things that cannot go on usually go on for a lot longer than you thought they would.

There are always quite a lot of these situations happening for example

• The overgenerous pension systems in Europe that still has to deal with unfavourable demographics

• the outrageous deficits governments are running without any plan to cut back on expenses

• leveraged cyclical companies having outperformed well funded low debt companies with a solid business in the current recovery

At the moment the media has ignored probably the biggest situation that cannot go on as it has.

It is the perilous over leveraged situation in Japan and a catalyst to bring the system down may be the appointment of free spending finance minister recently.

According to the International Monetary FundJapan's gross public debt will reach 227% of GDP this year. This has been caused by deficits spending, mainly stimulus related, over a number of years.

Japan has been able to ring up this unbelievable amount of debt because of the super low interest rates.   It has been able to borrow money at less than 1%.  This has led to the interest expense on government debt decreasing since 2005 despite of the outstanding debt increasing at a steady rate.

This low rate of borrowing looks like it may come to an end soon.

The main reason for this being the ageing Japanese population.

The Japanese government has been able to finance itself cheaply because of the high Japanese savings rate and price deflation. As the population ages and savings rate decreases and the natural buyer of government bonds disappear. The current savings rate in Japan for example is below 2%, lower than that of the USA.

Also the Japanese state pension fund became a net seller of Japanese government bonds last year.

What this all means is that Japan will have to find investors outside of Japan to refinance its existing debt, as well and as take on increased debt as deficit spending continues.

Good luck. I think they are unlikely to find anyone at the current low interest rate of, for example 1.3% for 10 years.

That means that interest rate will have to go up but, with debt nearly at 230% of GDP any interest rate increase of even 1%  will completely rip apart Japanese public finances.

Japan will be an interesting case study of much data developed economy with the ageing demographic profile takes on before it implodes.

I hope that politicians in the USA, Europe and the UK are watching.

Further Reading:

Japan braves bond markets with high-risk plans, talks down the yen
Bond jitters as Japan launches yet another stimulus plan
Dismount Fujii
Global bear rally will deflate as Japan leads world in sovereign bond crisis
Japan, deflating