I found an article I want to share with you that does a good job of very simply explaining why John Mauldin has made the observation that "Japan is a bug in search of a windshield".  I have posted a link to this article below.

It is estimated that if Japan’s interest rates on its bonds goes up by just 2%, that the interest and principal payments on its debt will use up all its tax revenues.  There will be no revenue left to fund their current spending.  There is a limit on how much money any government can print before investors drive interest rates up on their debt.

Japan's situation is similar to a neighbor needing most of their salary to pay the minimum payments on their credit cards and their mortgage each month.  They have turned to their parents to loan them the difference at a very low interest rate. However, their parents are about to retire and can no longer afford to lend them all the money they need.  Who do you think will lend money to them for food and other living expenses when their debt is so high relative to their income?  Speculators might for a while, but definitely not for 1% interest.  As interest rates increase to compensate outside lenders for their risk, their budget shortfall and debt will grow dramatically.  Your neighbor will be forced to default on their debt and declare bankruptcy.  

Japan has avoided a crisis so far simply because the Japanese people have historically been big savers and they have invested this savings in Japanese bonds, which currently are yielding in the neighborhood of 1%.  The Japanese people own 94% of Japanese bonds.  They lost so much money in Japanese real estate and Japanese stocks over the past 20 years that they are willing to earn low yields in exchange for the perceived safety of Japanese bonds.  It is the only investment that the Japanese people have not lost money on in the past 20 years.

However, Japan has a demographic problem in that many of these savers are approaching retirement age and will soon start spending instead of saving.  Japan will be forced to sell more of its bonds to people outside of Japan as its population ages and save less.  These investors will expect to be fairly compensated for the risk.

A more imminent risk is that defaults on PIIGS debt (Portugal, Ireland, Italy, Greece and Spain) combined with a growing awareness of the unsustainable debt levels in many western countries could cause a shift in perception.  Japanese savers perception that Japanese bonds are safe could shift as they see governments in Europe default on their debt.  Perceptions can change very rapidly, as we have seen this past year with Italy.

Kyle Bass, of Hayden Capital Management, believes that Japan will be forced to default on its debt possibly as soon as the next 3 to 5 years.  Japan is the third largest economy in the world so this will likely cause a major ripple effect throughout the global economy and raise investor concerns about the debt issues of other large developed countries such as the UK, France, and the U.S.  Kyle Bass hopes that the defaults in Europe combined with Japan will scare our politicians into finally showing some leadership and making real progress towards addressing our own deficit, before it is too late.

At some point, making a contrarian bet on Japan will pay off.  However, I haven't been able to find any ETFS (exchange traded funds) or ETNs (exchange traded notes) that aren't risky bets now.  It could take several years for the above risks to play out.

There are ultrashort ETFS by Powershares that bet against Japanese stocks or bet that the Yen will fall faster than the U.S. dollar.  They are both 200% leveraged and are extremely volatile.  Ultrashort funds are not safe to hold for longer periods of time.  They both also have low trading volumes, so there is some liquidity risk.

The author mentions JGBS, which is an exchange traded note that seeks to replicate, net of expenses, the performance of the Inverse JGB Futures Index.  This index attempts to mimic the performance of a short futures position on Japanese 10 year debt (e.g. they are betting against 10 year Japanese bonds).  

This exchange traded note is a senior unsecured debt obligation of Deutsche Bank.  With the current issues in Europe and the possibility that it could take 2 to 3 years or more before Japan’s interest rates run up, I believe there is significant credit risk with Deutsche Bank.  We can't be sure that if Deutsche Bank needs to be bailed out by Germany, that Germany will agree to bail out its bondholders and unsecured creditors.

Hopefully, we will have more investment options in the future.  In the meantime, Japan is a looming risk to the global economy that could become center stage sooner than many are expecting, especially if the PIIGS default.

http://seekingalpha.com/article/367891-when-japan-falls-we-will-feel-it?source=yahoo