In contrast to Europe, Japan has barely started to tighten its belt, drifting on with a budget deficit that will be 8pc of GDP as far out as 2013. "This is not affordable. Japan is running out of the domestic financial assets to absorb the debt," said Mr Ogawa.
Japan's population has been contracting since 2005, pioneering a fate that awaits much of Europe and Asia. Its median age is a world record at 44.4 years, and rising fast. The population will fall from 127.5m to 89.9m by 2055, according to Japan's Social Security Resarch Institute. "Despite this bleak demographic outlook, Japan has no specific measures or plans to deal with its diminishing and aging population," said S&P.
Japan was downgraded repeatedly between 1998 and 2002 without suffering much harm but that was in a different world, before the global credit crisis shattered illusions about the sanctity of sovereign debt.
The Bank for International Settlements has warned that simmering fiscal problems in the rich countries are nearing "boiling point", with a risk of an "abrupt rise" in bond yields as investors choke on excess debt.
Kaoru Yosano, Japan's economy minister, called S&P's decision "regrettable" given that the government is working on a plan to overhaul the tax and social security system. "I hope the world will understand our sincere efforts to carry out fiscal consolidation. I believe confidence in Japan will not be shaken."
Mr Yosano himself said last week that Japan has reached a "critical point" where investor patience might suddenly snap. "We face a dreadful dream that one day the long-term interest rate might rise."
Mr Jessop said the S&P downgrade is no shock since the country was already on negative watch. However, the Democratic Party of Japan – hampered since June by a hung parliament – has not yet shown that it is "up to the job" of restoring discipline.
"If the government gets this wrong, Japan could be the first Asian casualty of the global financial crisis. Markets have tolerated Japan's awful fiscal position because it was the fastest growing economy in the G7 last year, thanks to a rebound in exports and fiscal stimulus. But it all started to go horribly wrong in the fourth quarter when the economy almost certainly contracted again," he said.
Adarsh Sinha from Bank of America said Tokyo is on borrowed time but does not expect a bond crisis this year. "Inexorable structural forces mean that each year brings us closer to when the domestic pool of saving will be insufficient to finance Japan's public debt. However, 2011 is unlikely to be the tipping point for this disorderly adjustment."
Tax revenues covered just 52pc of spending in 2010. Almost half the budget was borrowed. Even in the boom year of fiscal 2007 revenues covered only 70pc of outlays, so the problem is clearly chronic and not caused by the recent recession.
The IMF's latest Article IV report on Japan warns that without a shift in policy the "public debt-to-revenue ratio" will rise from 263pc three years ago to 482pc by 2015. No country in peacetime has ever pushed the fiscal boundaries so far and emerged unscathed.
Peter Tasker from Arcus Research, a venerated Tokyo expert, said horror stories about Japan's debt have been the stuff of folklore for years, yet borrowing costs have fallen ever lower anyway because the country is "entirely self-financing". If need be, the Japanese can squeeze a lot more tax from their under-taxed economy.
"Rather than a 'dreadful dream', Japan's leaders face an enticing reality. They have the opportunity to issue more and more bonds at the lowest interest rates seen since the Babylonians invented accounting. Japan needs to forget about the views of credit agencies, which have not had a terribly good track record recently," he wrote recently.
Japan has certainly been shielded from global vigilantes so far because 95pc of its debt is held by local investors, allowing Tokyo to issue 10-year bonds at just 1.21pc. It is far from clear that this can continue. The Government Pension Investment Fund (GPIF) – the biggest holder of Japanese debt – has switched from net buyer to net seller as it meets payout costs for retiring baby-boomers.
Dylan Grice, a noted Japan bear at Societe Generale, said the country's ageing crisis would bite in earnest in two to three years, causing pensioners to run down their assets. The savings rate has already dropped from 15pc of GDP in 1990 to under 3pc. It may soon turn negative, depleting reserves needed to soak up state debt.
"They will have to turn to foreign investors, who will demand higher yields of 4pc to 5pc. The government will not be able pay this because interest payments are already 28pc of tax revenues," he said.
"If they try to correct it by a fiscal contraction [raising taxes] they will cause a depression that dwarfs anything in Greece. The Japanese are facing a problem that no country has ever faced before. I think Japan is already is beyond the pale," he said.
Mr Grice predicts the get-out-of-jail-free card will prove to be some sort of stealth default through inflation, perhaps spiralling into hyperinflation very fast once the genie is out of the bottle.
James Bullard, the head of the St Louis Federal Reserve, said recently that the US is "closer to a Japanese-style outcome today than at any time in recent history". That bears thinking about.
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