Up to now a high Japanese domestic saving rate and temporary inflow of foreign investment--thanks to weak competition (low interest rates) in the West, since the 2008 financial crisis--has financed the government deficits. But that's going to change;
The surge in foreign holdings of Japanese government securities will not continue indefinitely because risk in the rest of the world will eventually decline (in fact, risk levels on government securities in the US and the Eurozone had already declined sharply by early 2010). This is because investors’ appetite for risk will eventually return as the Eurozone crisis subsides, and because bond markets are developing in emerging Asia and creating increasing competition for Japanese bonds (especially since they offer higher yields and the possibility of currency appreciation as their economies grow further).And, demographics within Japan;
... the household and private saving rates in Japan can be expected to decline even further due to the aging population, meaning that domestic banks and insurance companies will not continue to have sufficient bank and postal deposits, insurance policies, and pension funds from the household sector to invest in Japanese government securities.Hara-kiri, here we come;
Japan’s massive government debt has not wreaked havoc in the past because of robust domestic saving, especially household saving (and, in more recent years, corporate saving) and a temporary inflow of foreign capital caused by the Global Financial Crisis, but it may wreak havoc in the future as both of these factors become less applicable unless the government debt-to-GDP ratio can be brought under control quickly.