Looking to Japan

Let's watch Japan closely because the U.S. and Europe are heading down the same path.

We know we are likely to get some argument on this one for the simple fact that Japan's added complication is now a shrinking population, where it is not shrinking in the U.S. and Europe. Very true, we cannot argue that point.

We are more concerned with the aging demographic and what it means for government spending, taxes, and debt levels. All will know that Japan is fiscally bankrupt; their debt to GDP is alarming and unmanageable.

For example, social security spending in Japan has leapt from 19.7% of the federal budget to more than 31% in the past decade (between 2000 and 2011), according to Japan's Ministry of Finance.

Debt service costs with Japanese rates at about 1% are about 23% of GDP (it is about 20% of GDP in the U.S.). The major reason for quantitative easing serves the dual purpose of keeping debt financing costs lower, yet at the same time helping (hope) to stimulate the economic recovery, though in Japan's case, it has not worked well against the headwinds of aging demographics.

The triple threat of debt, deleveraging, and demographics will most certainly provide significant economic risks in the coming years. Check out the full 2 part analysis blogged by Ron Rimkus of the CFA Institute.

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