T roubles are coming to the Japanese economy not as single spies but in battalions. Its economy is in recession, its public finances are on an unsustainable path, and its currency keeps plumbing new record lows. If there is one good thing that can be said about Japan’s current economic mess, it is that it offers a cautionary tale for us. If Congress is slow in putting our dismal public finances on a more sustainable footing, we might find, in time, ourselves confronted with a dollar crisis, rising inflation, and a stagnating economy.

One indication of Japan’s economic weakness is the recent plunge in the yen to its multi-decade low of 155 yen to the dollar. The principal reason for the yen’s weakness is the large interest-rate differential between Japan and the United States. The Federal Reserve has raised its policy rate to 5.25 percent to get inflation down towards its 2 percent target, while until last month, the Bank of Japan had maintained a negative-interest-rate policy for 17 years. It has now been increased from a range of 0 to a princely 0.1 percent.

The decline of the Japanese currency, which began more or less when the Fed started increasing rates, has already considerably increased the country’s import costs and sent core inflation up to 2.6 percent. If the yen continues to sink lower, Japan will join the ranks of those countries having an inflation problem.

However, unlike other countries, Japan will have difficulty using interest-rate policy to support the currency and deal with inflation for fear of aggravating an already complicated public-finance picture. Even with interest rates at zero, Japan is currently running a budget deficit of some 6 ½ percent of GDP. Meanwhile, according to the International Monetary Fund (IMF), its gross public debt has reached 250 percent of GDP.

These poor public finances severely limit the Bank of Japan’s ability to allow interest rates to be freely set in the market and to stop its bond-buying program. With its debt mountain so high, letting the interest rate rise in a meaningful way to support the currency would raise the government’s interest payments and put the public debt on a truly explosive path.

Japan’s demographic troubles make its economic challenges worse. With a declining and rapidly aging population, there is little prospect that Japan will be able to grow its way out of its public-debt problem in the way that the U.S. did after the Second World War. Indeed, there is every reason to think that the increased public spending associated with an aging population will only further aggravate that country’s public finances.

Budget policy also has its limits. With the economy in recession, belt-tightening would risk deepening that recession. With the exchange rate already on the ropes, the Bank of Japan can hardly cut interest rates as an offset to belt-tightening without risking a further plunge in the currency.

Before we take comfort in the fact that at around 100 percent of GDP, U.S. public debt is half that of Japan, we should note that unlike Japan, where household savings are high, the U.S. is the world’s largest debtor nation. That means the U.S. is dependent on the kindness of strangers to finance its deficit.

As of the end of last year, foreigners owned $8 trillion of U.S. government debt. This makes the U.S. particularly vulnerable to a funding crisis should foreigners come to believe that it cannot put its public debt on a more sustainable path. If they were to come to that conclusion, they would not only be unwilling to finance the budget deficit, but they would also begin to dump their large Treasury bond holdings, which would send the dollar reeling.

All of this suggests that Congress would be wise to heed the Congressional Budget Office’s warning that, on present policies, public debt will soon rise to record levels exceeding those at the end of the Second World War. If the U.S. is to avoid Japan’s current economic predicament, Congress would need to take far-reaching spending measures and undertake tax reform to meaningfully reduce the budget deficit while there is still room for fiscal-policy maneuver. However, judging by the lack of any serious constituency in Congress for responsible budget policy, I am not holding my breath for that to happen.