Indeed, during the last few months, investor's concern over Japan sovereign risk has risen significantly, mostly due to a growing fiscal deficit (9.7% of GDP in 2009 fiscal year) and unprecedented gross national debt (197% of GDP). However, despite the negative outlook, Japan's cost of borrowing has remain relatively the same. In fact, the yield on Japanese 10 year bonds is one of the lowest in the world, just below 1.5%. The explanation to this relation is quite simple. In net terms, the national debt is just over 100% for this year because of the country’s large reserves of foreign currency. For example, in December Japan was holding $768.8bn of United States treasuries. More importantly, almost 95% of government bonds are held by Japanese of which 40% is owned by public institutions like Postal Service or public pension funds.
Yet, within the next few decades, circumstances may change. Like in many post industrialized nations Japan's population is aging. It is estimated that by 2050, 37% of Japanese will be above 65 years (in 2010 - 23%) and by 2025, 27% of national income would be spent on social welfare. To make things even worst, demographic pressure have been also influencing households savings rate. For example, in the 80's and 90's, Japanese were putting away more than 10% of their income, now only 3%. Looking further, the way the current administration, the Democratic Party of Japan, is dealing with the crisis is likely to make things worse by making structural deficits even bigger. In fact, a big fiscal stimulus aiming at boosting consumer spending combined with a fall in tax revenues may boost the sale of government bonds, thus driving their yield higher and making the debt more expensive and less sustainable.