Forget Europe – Japan’s debt is the real threat

While everyone is focusing on Europe, a far more dangerous debt crisis is developing, says a former adviser to billionaire investor George Soros. Takeshi Fujimaki now runs his own investment company in Japan, but is best known for helping the legendary Hungarian-American investor.

Fujimaki thinks that Japan's debt situation is far worse than Europe's: "Japan is likely to default before Europe does, which could be in the next five years", he told Bloomberg.

If Japan were to default, it would have a huge impact on the world's financial system. At $10 trillion, the country's debt pile is the second biggest in the world. Compared to the size of the economy, the situation is even worse. It is 236% of GDP, compared to 153% in Europe's most-indebted country, Greece.

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"The yen and the JGB [Japanese government bond] market are in a bubble", Fujimaki said. "With the gigantic debt Japan has accumulated, a thin needle, or even a gentle breeze may pop this. Events in Europe can possibly trigger this to blow up."

His advice? Investors should look for stronger currencies, such as the US dollar, Swiss franc, Australian and Canadian dollars, and even sterling. Fujimaki says that he is already buying dollars "in case of an emergency".

Of course, Japan's mammoth debt levels are no secret. Until now markets have remained sanguine about default because only about 7% of it is held by international investors. The rest is owned by domestic savers who have remained faithful buyers, keeping yields low.

However, Fujimaki thinks that faith will not last forever. "There's no way out of Japan's crisis," he said. "The only option left for Japan is either default or print money into hyper-inflation."

A Japanese default would rattle investor confidence and almost certainly send stock markets plunging in the short term. But it could also provide opportunities. For example, Fujimaki thinks the value of the yen would collapse, from the current rate of about 80 per dollar to around 500. That would be great for some of the country's exporters.