Since the economic bubble burst in the early 1990s, Japan has suffered from a series of recession. To rescue the economy, Japan has become the first industrialized country to implement quantitative easing (QE).

In comparison, the QE measures adopted by the United States and the European Union have a much more far-reaching impact on the world, mainly because both the dollar and euro have a larger scale of internationalization, with more dollar- and euro-denominated debt being held by overseas institutions, governments and investors. Japanese debt, on the other hand, is mainly held by Japanese households. This may be due to the unique features of the Japanese financial market and social system, but the fact is that the lack of internationalization of Japanese debt makes the Japanese debt problem less problematic, at least in terms of its impact on international financial markets.

Nevertheless, the lack of internationalization of Japanese debt is changing. According to the latest figures from the Bank of Japan - the Japanese central bank -- the holdings of Japanese national debt under foreign hands have reached 8.6 trillion yen, representing an annual rise of 11 percent. In terms of percentage, overseas holding of Japanese national debt is now 9.1 percent, also a historical high. The figures show that, indeed, the Japanese debt issue is becoming more internationalized, and the impact can be far-reaching.

People are concerned about the US debt problem. However, Japan's debt issue is not optimistic either. Current American debt-to-GDP ratio is about 102 percent, but the same ratio for Japan is 228 percent. If we call US debt a problem, Japanese debt is indeed a much bigger nightmare. Financial markets are not stupid, the trick is that majority of US debt is in overseas hands because US dollar-denominated assets have a special position as reserve assets. Though Japan's debt-to-GDP ratio is double that of the US, the international impact of Japan's debt problem was not under the spotlight as Japanese national debt is traditionally held by Japanese investors. Yet, as mentioned above, things are changing. With a greater amount of Japan's debt in international hands, Japan's debt problem will become an international issue sooner or later.

Another point worth mentioning is that under the new administration of Prime Minister Shinzo Abe, the Bank of Japan will start another round of assets buyback with a target of 10 trillion yen. This means the Japanese government will inject more liquidity into the market, making a new QE round. When the Bank of Japan goes for another round of QE, it will buy more bonds. With a buyer on hand, the Japanese government can issue more bonds with low interest rates. The excess liquidity will push interest rates lower and financial markets worldwide will definitely be affected.

In terms of debt capacity, the net assets of Japanese households reach 1,156 trillion yen, while the national debt is 1,133 trillion yen. The difference is around 23 trillion yen. The increase in assets buyback already hits 10 trillion yen, which means there is not much domestic capacity left for absorbing any newly-issued debt. In other words, if the Japanese government continues with its current economic policies and has no way out in economic development, it has to go to foreign lenders for funds. Worst still, it is doubtful if the Japanese government can issue debt at such interest rates. With the worsening debt-to-GDP ratio and an unreasonable debt level, new lenders are likely to ask for a fair risk premium for the lending. Can the Japanese economy afford the new borrowing? Can Japan still rely on new borrowing for economic development? These are questions with no answers. Japan's economy is not optimistic at all.

The author is dean, School of Business, Hang Seng Management College. The views expressed here are entirely his own.

(HK Edition 01/04/2013 page2)