The UK's Telegraph (Ambrose Evans-Pritchard)is warning that global investors and governments should be worrying about Japan's debt more than the US debt.

The scenario is that Japan is drifting helplessly toward a fiscal crisis. Simon Johnson, former IMF chief economist, reportedly told the US Congress that Japan's debt path is essentially out of control, and that there is a real risk of Japan ending up in a major default. According to new IMF forecasts, Japan's public debt is seen ballooning to 218% in 2009 from a prior 197% or so, rising further to 227% in 2010 and to a whopping 246% by 2014. This level of indebtedness is unprecedented in peace time economies.

Heretofore, the bulk of Japan's public debt has been absorbed by the private sector through excess savings. But Japan's savings rate has plunged from 15% in 1990 to 2%. Japan's (and the world's) largest pension fund, the GPIF, has become a net seller of JGBs to fund pay-out obligations, and the Japan Post Bank is baulking at adding more JGBs to their $1.7 trillion outstanding balance. If bond rates in Japan were to rise to 3%~4%, it could shatter the government's finances. JGB yields were at 2% as recently as 2007.

Carl Weinberg of High Frequency Economics, always one to not shy away from hyperbole, is quoted as saying that the Japanese debt situation is irrecoverable, with the potential outcome being fiscal shutdown, lost pensions and bank failures. Japan is also again on the verge of a deflation spiral that will exacerbate the debt burden.
Financial markets are beginning to discount this risk, with CDS on 5-year debt jumping from 35bps to 63bps, or above and away global peers like Germany, France, the US and the UK.