Japan's government has a lot of debt. Not as much as people think -- since much of that debt is owed by one branch of the government to another, net debt held by the public is only 134 percent of gross domestic product, not the widely quoted figure of 240 percent. But 134 percent is still a lot. About 15.6 percent of Japanese tax revenue goes to pay interest on this debt every year -- about the same as for the U.S. This is a moderate burden on government finances, but one that would quickly become unsustainable if interest rates were to spike.
How do governments deal with a rising debt-to-GDP ratio? There are three basic ways: consolidate, monetize, or default. Figuring out which of these Japan will do is the key to predicting the nation's economic future.