The Next Financial Ticking Time Bomb
While many eyes are focusing on Europe and America when it comes to the next financial crisis, one sector that people aren’t focusing on is the bond market in Japan. Many investors might not realize it, but Japan might be the next financial ticking time bomb.
How does a financial crisis in the bond market affect the average person? On a basic level, the bond market prices move based on supply and demand, which affect interest rates. With greater demand in the bond market, this pushes up prices and lowers interest rates. A lower interest rate obviously helps prevent a financial crisis from occurring, as it takes less money to pay off the debt—much like a credit card interest rate being reduced.
Conversely, if investors are worried about their funds in the bond market, this will cause selling or a reduction in purchases, a decline in prices, and a rise in interest rates. For countries that have a large amount of debt, higher interest rates will cause a financial crisis, as the funds available to maintain that debt are limited and could run out.
Much like a person who racks up very high credit card debt, at some point the income from the person’s job is not enough to make the minimum payment, let alone pay down the principal. The end result is a financial crisis.
Japan has a massive debt-to-GDP (gross domestic product) level of 211%, much higher than America’s or even Greece’s debt burden. (Source: Trading Economics, last accessed January 7, 2013.)