Japan's economy is on a war footing. For the first time since the end of the second world war, the government is issuing more new debt than it is taking in via tax revenues. That is only partly thanks to Tokyo's latest stimulus programme, worth Y7,200bn ($81bn) or 1.5 per cent of gross domestic product. While this is designed to prevent a double-dip recession, even the government seems unclear where the extra money will come from.

With total debt heading towards 200 per cent of gross domestic product, Japan is already the world's most indebted large economy. The danger it faces is of a “debt trap”. With 10-year interest rates at, say, 1.5 per cent, Japan needs to run a primary budget surplus of 3 per cent of GDP merely to meet interest payments. Shrinking its debt mountain requires an even bigger surplus – or faster growth. At some point, the government will have to cut spending – just not now.

Such dynamics have made shorting Japanese government bonds a popular trade of late. Either the economy is shot, in which case Japan will have to issue more debt and yields will rise, or it is going to recover, in which case current low yields make little sense. (Although with deflation of 2 per cent, the real yield on Japanese bonds is rather high.)