In a global financial system, the collapse or even perceived weakness of a large economy such as Japan would be catastrophic. And Japan is not doing well. For a while now it has been coasting towards a crisis, flirting with its own financial ruin.



One way to measure what the market thinks about the risk inherent in Japan's financial instruments are Credit Default Swaps (CDS). They are insurance policies against Japan's possible default. A CDS on five-year Japanese debt have risen from 35 to 63 basis points since early September (meaning that to insure $10,000 worth of Japanese five year bonds, you recently had to pay $63).



The fact that market participants are willing to pay significantly higher prices for insurance on Japan's fiscal strength is an important cautionary tale (for comparison, the price of insurance on Germany is 21 basis points, the U.S. 22).



In 2009, Japan's budget deficit was 10% of GDP. Total government debt is close to 200% of GDP. Economic growth has been slow for years and previous stimulus plans have been failing.

The Japane