TOKYO Ã¢â‚¬â€ Greece's debt problems may currently be in the spotlight but Japan is walking its own financial tightrope, analysts say, with a public debt mountain bigger than that of any other industrialised nation.
Public debt is expected to hit 200 percent of GDP in the next year as the government tries to spend its way out of the economic doldrums despite plummeting tax revenues and soaring welfare costs for its ageing population.
Based on fiscal 2010's nominal GDP of 475 trillion yen, Japan's debt is estimated to reach around 950 trillion yen -- or roughly 7.5 million yen per person.
Japan "can't finance" its record trillion-dollar budget passed in March for the coming year as it tries to stimulate its fragile economy, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
"Japan's revenue is roughly 37 trillion yen and debt is 44 trillion yen in fiscal 2010, " he said. "Its debt to budget ratio is more than 50 percent."
Without issuing more government bonds, Japan "would go bankrupt by 2011", he added.
Despite crawling out of a severe year-long recession in 2009, Japan's recovery remains fragile with deflation, high public debt and weak domestic demand all concerns for policymakers.
Japan was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, hitting corporate earnings and prompting consumers to put off purchases in the hope of further price drops.
Its huge public debt is a legacy of massive stimulus spending during the economic "lost decade" of the 1990s, as well as a series of pump-priming packages to tackle the recession which began in 2008.
Standard & Poor's in January warned that it might cut its rating on Japanese government bonds, which could raise Japan's borrowing costs amid the faltering efforts of Prime Minister Yukio Hatoyama's government to curb debt.
The system of Japanese government bonds being bought by institutions such as the huge Japan Post Bank has been key in enabling Japan to remain buoyant since its stock market crash of 1990.
"Japan's risk of default is low because it has a huge current account surplus, with the backing of private sector savings," to continue purchasing bonds, said Katsutoshi Inadome, bond strategist at Mitsubishi UFJ Securities.
But while Japan's risk of a Greek-style debt crisis is seen as much less likely, the event of risk becoming reality would be devastating, say analysts who question how long the government can continue its dependence on issuing public debt.
"There is no problem as long as there are flows of money in the bond market," said Kumano.
"It's hard to predict when the bond market might collapse, but it would happen when the market judges that Japan's ability to finance its debt is not sustainable anymore."
"And when that happens, the yen will plummet and a capital flight from Japan's government bonds to foreign bonds will occur," he said.
Yet others argue that there is no precedent for the ratio of debt to GDP nearing 200 percent being dangerous.
Nomura Securities economist Takehide Kiuchi cited Britain's government debt in the post-war period "which reached 260 percent but (the government) didn't face a debt crisis.
"There is no answer to the question of what the critical level of debt is for a government to go bust."
The likes of single-currency Greece and non-eurozone countries are also different in that the latter group have flexible currency exchange rates which are more closely calibrated to their fiscal conditions, he said.
Instead, the most realistic hazard brought by huge Japanese debt is prolonged deflation under a shrinking economy, say analysts.
"Regaining fiscal health needs fiscal austerity, which could weigh on economic growth," said Kiuchi.
"And when the economy is bad, people don't spend money as they are worried about their future, which in turn intensifies the deflational trend," he said.
Continued deflation could further worsen Japan's fiscal health because of less tax revenue and more stimulus spending, stirring fears over big tax hikes, which in turn weigh on demand and again reinforce deflation, analysts said.
The key to breaking the vicious cycle is drafting a feasible economic growth strategy for Japan, they said.
"If the economy grows, tax revenue increases," Kumano of Dai-ichi Life said.
Since 2001 Japan's annual growth rate has peaked at 2.7 percent in 2004.
The economy shrank 1.2 percent in 2008 and 5.2 percent last year.
Prime Minister Yukio Hatoyama's centre-left government has pledged to announce details of its new strategy in June, which aims to lift annual growth to two percent by focusing on the environment, health, tourism and improved ties with the rest of Asia.