If you do not mind, I would like to add my 2 cents to this question regarding internal financing. I have heard this argument time and again about how Japan finances from within. Why is this considered a strength? I consider it a very severe weakness. The way I see it, Japanese Government Bonds are held in very few hands. If one of the few owners (life insurance companies, pension plans, etc) turns seller, then who is there to pick up the slack? Everyone who wants to own JGBs already does. Do you think a non Japanese buyer is out there waiting to "buy a dip" in these toxic assets? Not a chance. It is also helpful to look at the math of the "self funding" mechanism of the JGB market. If you run a 1% current account surplus but you have a 10% fiscal deficit, then you have already sailed into the zone of insolvency.

Think about the position of a money manager in Japan. If the government is set out to hammer the yen and create inflation, then why in the world would those managers want to hold a .75% yielding instrument?

Bond markets, currencies, and banking systems all need one thing in order to survive..........confidence. When does that confidence get shaken? When it does, since JGBs are in such few hands, the bond market could get very ugly, very quickly.