NEW YORK (TheStreet) -- In the 1970s and 1980s, Japan was a world leader in economic growth. It has been a technological leader for decades. It then led the world in the 1990s into the current period of sluggish growth, zero interest rates and near-deflation. Recently, it doubled down on "stimulus" policies similar to those in many Western countries of big budget deficits and central bank buying of government bonds. However being further down the stimulus road, it may reach its destination first -- and for investors, it may not be pretty.

The explosive factor in Japan is its public debt. In 1990, this was moderate, at about 60% of GDP. Then the policy of budget deficits set in, and since 2009 Japan's debt has been more than 200% of GDP, reaching 240% of GDP this year. Nobody knows exactly where the limit is beyond which default is inevitable, but the highest debt level that has ever been paid down without defaulting is about 250% of GDP -- by Britain, which did it twice, after the Napoleonic Wars ended in 1815 and after World War II ended in 1945.

Having started a program of public overspending in the 1990s, Japan is still doing it -- the Economist magazine's survey estimates that Japan will run a budget deficit of 8% of GDP in 2014, the highest in the rich world. A sales tax increase from 5% to 8% in April slowed Japan's economy markedly, and a further increase to 10%, scheduled for October 2015, looks likely to be cancelled. Without tax increases, Japan's budget deficit will stay at present levels, since there is no political will for cuts in public spending.

Japan's central bank has now committed to triple the pace of its government bond purchases to 80 trillion yen per year ($700 billion, 15% of GDP). Proportionally, that's about 2.5 times as big as the Federal Reserve's bond buying program at its biggest extent in 2013.

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The best bet for Japan is a further sharp devaluation of the yen. In the last two years it has already dropped from 76 to 116 to the dollar. A bigger devaluation will increase exports, raise GDP in yen terms and produce some inflation, all of which will reduce the burden of Japan's public debt (since almost all of it is yen-denominated.) There is still some room for this, as Japan's current account is only in balance, rather than showing the large surpluses it had in the 1980s. However, China and Korea, Japan's main competitors, may well try to match Japan's devaluations.

It is possible that Japan's policy will work, causing the yen to decline, and inflation and growth to increase, without setting off a global trade war. In that case, Japanese equities might continue rising, though their rise for U.S. investors would be offset by the yen's decline.

However, there is also a strong possibility that it won't work. If Japan defaults on its government debt, the nation's financial system will collapse. It's also possible that having pushed the yen down, Japan will suffer uncontrollable inflation, like Weimar Germany in 1923 -- its combination of policies is quite similar. If either of those things happens, it's bad news for foreign investors. It may also be a harbinger of where the rest of us are headed in a decade or so.

There is some upside in Japan -- but a lot more downside.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Martin Hutchinson was an emerging-markets banker for 27 years in London, New York and Zagreb, Croatia, and has since worked for UPI, been a BreakingViews columnist at Thomson Reuters and published his own column, "The Bear's Lair," at With Kevin Dowd, he is the author of Alchemists of Loss (Wiley, 2010) on the 2008 crash. He has a Mathematics degree from Trinity College Cambridge and an MBA from Harvard Business School.