No one knows how to interpret these numbers. If someone had predicted 20 years ago that Japan’s debt would rise so spectacularly, the forecast would doubtlessly have inspired this alarm: Japan will pay crushing interest rates as fearful lenders demand high returns to compensate for the risk that government might default or inflate away its debt. Instead, the opposite has happened. Japanese investors — households, banks, insurers — have absorbed 94 percent of the debt, reports JPMorgan. Interest rates on 10-year Japanese government bonds have dropped from 7.1 percent in 1990 to 1.4 percent now.
Superficially, it’s possible to explain this. Japan has ample private savings to buy bonds; modest deflation — falling prices — makes low interest rates acceptable; and investors remain confident that new and maturing debt will be financed.
The American situation is similar. Despite huge deficits, interest rates on 10-year Treasury bonds have hovered around 3.5 percent. In time of financial crisis, investors have sought the apparent sanctuary of government bonds. But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates — and we don’t know when, how or whether that may happen.