Nov. 23 (Bloomberg) -- During a recent chat about global markets, a hedge-fund manager was obsessing about my $76,000.

That’s roughly what Japan owes for each of us 126 million inhabitants. This amount has some hedge-fund investors piling on the Japan trades.

The bad news for Asia’s biggest economy is that many such bets are against it. The focus is on the risk of a yen plunge because of a different $76,000 figure: the cost of insuring trades on Japan’s massive debt.

Does all this mean the great yen crash analysts have predicted for years is imminent? Hardly.

The cost of hedging against losses on $10 million of Japanese bonds with credit-default swaps soared this month to as much as $76,160 a year from $37,000 in August. The increase corresponds with the policies of a new government considering record spending and borrowing amid falling tax revenue.

The jump in debt-protection costs has a certain logic as Japan’s debt heads toward 200 percent of gross domestic product. That’s by far the largest in the industrialized world.

Many traders say Japan is more likely to renege on debt than the U.S. is. Last month, former International Monetary Fund Chief Economist Simon Johnson told the U.S. Congress that debt is out of control and said there is a “real risk that Japan could end up in a major default.”

Yen Crash?

Even so, a near-term yen crash is a reach. Reports in the local media that Finance Minister Hirohisa Fujii’s tolerance for a stronger currency may be running out are fueling speculation that Japan will intervene in markets. Here, though, it’s worth asking why Japan hasn’t already done that.

Japan spent the equivalent of the annual GDP of Greece in the 15 months through March 2004 to cap the yen. It was like mobsters whacking a rival now and again. For years after that, it didn’t intervene to weaken the currency. Finance Ministry officials only had to hint they were unhappy with the yen’s level, and markets would fall back in line.

When the U.S.’s subprime mess snowballed into a global meltdown, everything changed. As the dollar fell, the yen had nowhere to go but up. And up it went. The yen has risen about 25 percent against the dollar since January 2008, and Japan had to accept it. It’s all about the dollar, not the yen.

What can Japan do about it? A key reason members of the Group of Seven and Group of 20 aren’t coming to Japan’s rescue is agreement that the dollar needs to weaken. It’s about facilitating a badly needed rebalancing of global growth.

Unhealthy Codependence

The reserve currency is printed by a U.S. government that depends on imported capital to finance its excesses. The world relies on the excesses of the U.S. consumer. That unhealthy codependence must end and a weaker dollar is crucial.

Monitoring the global economy these days is like trying to work out an M.C. Escher drawing. Little makes sense in a world where the U.S. is nationalizing key industries, China’s economy is a role model and gold costs more than $1,100 an ounce.

The yen is among those absurdities. The combination of near-zero interest rates, unprecedented debt levels, a sinking savings rate and deflation should be devastating for any currency. And while a government default is extremely unlikely, credit downgrades can’t be ruled out. The mere specter of lower ratings should be negative for the yen.

Japan’s aging population and stagnant birthrate has traders questioning whether it can repay that $76,000 per person worth of debt. That figure will only grow in the years ahead as the workforce shrinks.

Global Imbalances

The surreal nature of government policies only adds to the disorientation. China’s undervalued currency, which is exacerbating global imbalances, comes to mind. Debt managers in the U.S. seem to be competing with their Japanese peers to test the tolerance of credit-rating companies in 2010.

This is where we are, though. Were the U.S. growing soundly and getting its fiscal act together, a weaker yen would be a safe bet. Japan could intervene in markets, yet it might fail. It would embolden speculators to drive the yen higher. That possibility explains why Japan has been holding its fire.

Japan certainly could use some help fighting deflation. The domestic demand deflator, a measure of price levels that excludes the cost of imports, fell 2.6 percent in the third quarter from a year earlier. It was the biggest drop since 1958 and eclipsed a 4.8 percent jump in growth.

You can bet Prime Minister Yukio Hatoyama and Fujii are wondering how to weaken the yen. Hedge-fund managers, too. It will be easier said than done in today’s world.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

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To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

Last Updated: November 22, 2009 15:00 EST