There is one argument that those who say we are all doomed and set to be strangled by massive fiscal deficit struggle to rebuff. Sure, the UK’s fiscal debt is huge, but compare the UK government’s total debt with Japan’s, and all of a sudden it looks quite modest.

In Japan, the problem has been saving. High savings rates have stripped the economy of demand, so it has seen two decades of deflation and economic anaemia. But on the other hand, the high saving rate has meant low interest rates and lots of money available for the government to borrow. In fact, it could be argued, and indeed some economists do say this, that the reason why it has proven necessary for the Japanese government to borrow so heavily is directly related to the fact that its citizens want to lend to it. The day there is less money available to lend to the Japanese government, will be the day Japanese consumption rises, the economy starts growing, and the government does not need to borrow so much.

The big flaw in this argument is demographics. As you know, the ageing of the Japanese is more advanced than in Europe. And no one has been able to provide an explanation of how Japan will possibly be able to fund its deficit when the size of the retired population greatly exceeds the size of the working population.

Besides, while some may argue that Japanese saving is too high, given that so many people in the land are going to retire soon it does seem as if saving is necessary to fund future retirement. It’s a dilemma, all right.

Ageing Japanese are saving for their retirement, and as a result economic performance has been dreadful and government debt has soared, meaning that the prospects for a prosperous retirement are diminishing. The more that the Japanese save for the future, the worse their future prospects look.

It is a dilemma we may well be facing in the West in a decade or so from now.

Writing in the FT, Martin Wolf came up with an odd suggestion.

He said what Japan’s government needs to do is create inflation, thereby pushing up interest rates, so that the price of bonds will fall, say by 40 per cent. At that point the government then buys its debt back at a 40 per cent discount on its current level. It’s a clever plan, but has some flaws which the normally quite brilliant Mr Wolf failed to point out. First of all, creating inflation in Japan has proven to be nigh on impossible. Secondly, his solution is effectively for Japan to inflate its way out of trouble. What is odd is that many have been predicting that governments will indeed do this, that is, inflate their way out of debt and in the process create the risk of hyperinflation. And yet for some time Mr Wolf has steadily been arguing that deflation, not inflation, is the risk to the economy.

It is not clear whether he was actually taking the proverbial . See Alan you have diagnosed perfectly, but it is not the Japanese way. Alan Greenspan Japan

Anyway, now, Naoto Kan, Japan’s new prime minister, has warned that Japan may have a Greek-style crisis on its hands. In fact, at 200 per cent of GDP, the Japanese government’s debt dwarfs the size of debt in Greece (relative to GDP), but at least Japan does not have the same problem with competitiveness. And so far, markets have been more than happy to lend to the country. Mr Kan said: “Our country’s outstanding public debt is huge… our public finances have become the worst of any developed country… It is difficult to continue our fiscal policies by heavily relying on the issuance of government bonds. Like the confusion in the eurozone triggered by Greece, there is a risk of collapse if we leave the increase of the public debt untouched and then lose the trust of the bond markets.” See Japan PM Naoto Kan warns of ‘collapse’ under debt pile

Japan is a tough one all right. You can see why it needs more saving, but it is the high saving that has caused its difficulties. It is the same with the global economy. High savings in parts of the world, and high savings by corporates, was the real problem before the economic crisis and it is the problem now. And as governments start cutting back without dealing with the causes of imbalances, it is becoming increasingly hard to see how another recession, worse even than the one we just had, can be avoided in a year or so’s time.

But at least there’s good news from across the water from Japan, in China.

Strikes are in the news. We touched on this on Thursday – see At last, Chinese wages rise: is this the end of bubbles?

But so significant is this development that it is worth reiterating it. Strikes have been sweeping across industrial China. Some have drawn parallels with the independent labour movement that grew up in Poland during the 1980s and which may have been a factor in the eventual collapse of the Soviet Union. Now, the thought of that is not going down well with Chinese authorities.

The real problem in China is complex. The government and the workers are largely on the same side. Workers are striking because they feel their employers are making profits at the expense of their wages. Earlier this year the Chinese government said something similar, saying it wanted to see wages rise. See China solves economic crisis with cunning plan

Higher wages in China is essential. In China, workers are demanding it. But US and European exporters want it too. It is not just China. Across the globe, higher wages in surplus countries, and even some deficit countries, may be the ultimate solution to a sustainable global economy. See the piece written here a few weeks ago, Did globalisation cause the economic crisis?

And for more on strikes in China, see the Wall Street Journal, Chinese Workers Challenge Beijing’s Authority

So that’s good news, but Georgie Boy Soros is still worried that the economic crisis is set to reach its next stage: see Economic crisis: Act II