Dylan Grice of the Societe Generale strategy team put a punchy note out yesterday on the Japan-national-debt-default-or-hyperinflation theme that occurs when one looks at forecasts of 2010 government net and gross debt of 115 per cent and 227 per cent of GDP.

Here’s a taster (the note has also been written up in apocalyptic tones today by Ambrose Evans-Pritchard of the Telegraph).

Japan’s government borrows from Japanese households and has done for decades. But Japanese households are retiring, and traditionally retirees run down their savings. So who will fund Japan’s future deficits, which are already within the range identified by inflation historian Peter Bernholz as hyperinflation ‘red flags’? Twenty years ago, who could predict long-term JGB yields below 1%? Who sees uncontrolled inflation as the primary risk facing Japan today?

Government debt cannot rise indefinitely as a share of GDP, while the greater the stock of debt and the greater the flow in any given year, the greater the chance of a crisis. I don’t agree, however, that (a) Japan is about to run out of domestic savings to fund its deficit or that (b) the most likely nature of the final crisis is hyperinflation.

As Mr Grice argues, Japan’s household savings are in decline as the population ages. Governments that need to borrow from overseas – most seriously those that need to borrow in a currency they cannot print – are in much greater danger of a debt crisis.

Japan is still very far from that position, however. Read more