I happened to read Michael Schuman's article in Time. The title is "Will Japan's Next Prime Minister Start a Debt Crisis?" .
My immediate reaction: I hope so. Because the only thing that can save Japan is a debt crisis. It's a pity Japan didn't have a debt crisis 20 years ago, but better late than never. And the longer Japan waits before having a debt crisis, the harder it will be to control. And it will have a debt crisis eventually. But can he do it? And what would be the best way to start a debt crisis?
When people don't want to hold your debt, or your money, they will spend it, which is exactly what Japan needs. But (as I said in this old post) too much of a good thing is a bad thing, because you end up with too much inflation, rather than just an end to deflation and recession. So if you get too big a debt crisis you have to offer much higher interest rates to persuade people to buy new debt to rollover the old debt. And you have to increase taxes or cut spending so they know they will eventually get repaid.
It's a lot easier to control a debt crisis when debt is 25% of GDP than when it's 250% of GDP. If you need to raise interest rates 1% to control a debt crisis, that's an extra 0.25% of GDP in taxes in the first case, and an extra 2.5% of GDP in taxes in the second case. If you need to raise interest rates 4% to control a debt crisis, that's an extra 1% of GDP in taxes in the first case, and an extra 10%% of GDP in taxes in the second case.
It won't be as scary as those numbers make it look. The debt crisis will be partly self-solving, because the economic recovery that comes with it will increase tax revenues, and because the government will be able to stop spending on things that weren't really needed except to create demand. And long run growth will mean the denominator in the debt/GDP figure will be rising. Britain had debt/GDP ratios that high in the past two centuries, and survived. But the fact that it doesn't look that scary yet is precisely the problem.
I can think of two ways for Japan to start a debt crisis.
The first is monetary policy. Something like a level path target for nominal GDP would make real assets and goods more attractive relative to nominal bonds and money, so people would want to sell bonds and money to buy real goods.
The second is fiscal policy. Keep on increasing the debt/GDP ratio until it gets high enough to frighten the bondholders so they don't want to hold any more.
There's one big problem with that second strategy: unless Japan's bondholders scare easily, and they don't seem to, a debt/GDP ratio big enough to frighten the Japanese bondholders would be frightening.
As the Duke of Wellington once said: "I don't know what effect these men will have upon the enemy, but by God, they frighten me."