Tim Fernholz offers the chart above as evidence that if you’re worried about public debt, Japan is the place to worry about, with its sky-high debt:GDP ratio and sluggish growth.
The really interesting thing about Japan, though, is that they very much aren’t having a public debt crisis. Japan’s borrowing is all in Yen, the debt is almost all held inside Japan, and as best anyone can tell the Bank of Japan stands prepared to deliver affordable rollover of the debt. But it’s extremely difficult to look at this picture and not see a burst of elevated inflation in Japan’s future. That doesn’t mean crazy hyperinflation, but it would mean a sustained period of 4-5 percent inflation to erode the value of some of this legacy borrowing probably combined with “financial repression” to force Japan’s thrifty households to keep their financial holdings in Japan. The odd thing is that on almost all accounts an increase in medium-term Japanese inflation expectations would be extremely good for the Japanese economy, bolstering real output considerably. So why don’t Japanese policymakers get with the program and make it happen? Ever since policymakers in the United States and the European Union set about to prove that they, too, could be weirdly passive in the face of macroeconomic disaster people have spent less time wondering what the Japanese are thinking but it’s still very strange. Here’s Krugman puzzling over this in 1999 and it hasn’t really changed at all since.