Japan's Debt Trap

It's hard to see how Japan's fiscal situation is anything but a crisis. Its national debt is fast approaching 200% of GDP. Its population is shrinking, meaning transfer payments rise as tax revenues fall. Additionally, Japan's life expectancy is one of the highest in the world. Japan is in a debt trap, where interest expense increases faster than its ability to pay it off.

Though Japan's debt has ballooned, yields have actually decreased. The reason for these low yields is the commitment of Japanese firms and households to Japanese bonds. Japanese debt is very unattractive to an investor, yielding only 1.4% for 10 years. Unsurprisingly, foreign ownership of Japanese bonds is only 6.4% as of last March, down from 7.9% a year ago.

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The Next Front

Last Friday, Japan released its annual military white paper, which outlines Japan's military operations over the past year. This white paper outlined continued expansion of the Self Defense Forces, which some see as a reaction to the Chinese military build-up and naval expansion. One interesting aspect of this white paper was a new focus on space, perhaps a reaction to the Chinese space program. Either way, it shows the increasing importance of space for the military.

Interestingly, the white paper describes Japan's new efforts in space in the same section that it describes Japan's new approach to its navy. Militarily, the two have a lot in common. For centuries, sea power has been the main determinant of international hegemony--an expanding Navy was, and still is, a sign of an emerging power. The most powerful navy almost always belonged to the global Hegemon--think Spain 1500s, Great Britain 1800s, and the US at present. This importance of the navy is best shown in Mahan's classic The Influence of Seapower Upon History.

Space is important for the military for the same reasons the navy is important. Both play indispensable roles in transportation, communication, and intelligence. Also, success in both relies on being at the forefront of technology. Having better satellites is now the equivalent of using oil engines in ships during World War I. As technology improves, the competitive advantage of being a space power will increase exponentially. Not that that is a new idea, NASA is mainly a military organization.

I wrote in April that Defense Secretary Gates' new defense budget is a step in the right direction considering the direction military conflicts are headed. Warfare is diverging into two distinct types. One focused on insurgency warfare, the kind of war seen in Iraq and Afghanistan, the US' unmanned aerial vehicle attacks in Pakistan, and even the Somali pirate operation. The other is about technology. This new front is about satellites and missiles. The fact that even Japan's self-defense force, which is constitutionally pacifist, is addressing this theater underscores its importance. One can envision a world where power is derived from powerful satellites as much as a web of bases and a strong navy.