With Greece’s debt troubles, a lot of international investors are bullish on the euro. But there is one Asian currency that may soon follow the unraveling euro, and that’s the Japanese yen. In the forex universe, Greek debt and its impact on the euro zone is soon going to be overshadowed by currency problems in Japan.

First, a little background: Japan is part of Asia, but it is very different in many ways. The island nation was hailed as an economic miracle shortly after WWII. And while that booming prosperity lasted for about three decades, problems began to appear in 1990. Banks lent against the overvalued collateral of the massively-inflated property market, and we have had first-hand experience where that path leads. So due to the problems with the financial system, the Japanese economy has had two lost decades.

In fact, at the end of 2009 the annualized rate of the level of GDP was at 471 trillion yen ($5 trillion), the lowest level since 1991. We have never had such a collapse of GDP in peacetime among any developed economy.

Is It Too Late for Japan?

In a virtuous economic cycle, the economy grows, consumers have more money to spend, banks have more money to lend, and the cycle repeats itself forwards and higher. On the other hand, if you even wondered what a vicious economic cycle looks like, take a glance at Japan.

As the Japanese economy shrinks, the government has had to run record deficits, even as tax revenue is projected to drop to a 25-year low in 2010. No surprise that the debt-to-GDP ratio is projected to keep climbing. By comparison, the U.S. has yet reached a 100% federal debt-to-GDP ratio, while Japan’s is approaching 200%.

In addition, Japan actually has a bigger absolute return government debt level than the U.S. The Land of the Rising Sun currently has $8.96 trillion of Japanese Government Bonds, while the U.S. has about $8.78 trillion of U.S. federal debt. So, with an economy that is about half that of the U.S. and still mired in deflation, that government debt is projected to rise to about 250% of GDP in the next five years, while U.S. federal debt to GDP is expected to stay under 100%.

With that said, at the moment the Japanese government is saved by deflation. Right now, they only have to pay 1.33% on 10-year Japanese Government Bonds, while in the U.S. the federal government pays an extra 2.5% on top of that rate on 10-year Treasuries. But, real interest rates in Japan aren’t as low as they seem due to the weak economy and high deflation rate, which causes them to be much higher than nominal rates.

The saving grace has been Japanese consumers and corporations that have allowed that skyrocketing government debt to be funded domestically. Most Asians are notorious savers — China is a great example in that regard. And the Japanese used to be that way 20 years ago, but the nation’s aging population has been shrinking since 2006 and is eating into the savings stockpile — meaning more government expenditure and less government revenue. In other words, Japan is preparing to be the first government bond train wreck of the 21st century.

4 Japan Stocks to Buy Amid Yen Woes

While Japan is a huge trading partner for China, clearly the Chinese do not want to become dependent on weak economies like Japan and the E.U. This has finally forced the Chinese government to focus on stimulating domestic demand.

In addition, a problematic Japanese yen is ultimately bullish for the Chinese yuan, which could eventually become the world’s next reserve currency if the Chinese government continues on its responsible policy of containing asset bubbles and maintaining stable GDP growth. In fact, problems with the euro and the yen are bullish for all BRIC currencies as economic growth there is likely to be a lot higher with much lower debt levels than the rest of the developed world.

For global investors, I advice to stay away from index investments in Japan and play the market there from a trading perspective — buy it when it is cheap and sell it when it gets expensive. Considering that the stock market in Japan is still nearly 70% below the highs reached in 1989, this trading strategy only makes sense.

Are there any Japanese companies that are play on China and the other BRICs? Well, Japanese exporters are notorious for their global presence. And while a problematic Japanese economy is not good for any Japanese company, Japanese corporations have been fiercely competitive abroad and many are better plays on the economic growth in BRIC nations, rather than Japan.

Nissan (NASDAQ: NSANY) is boosting capacity in China by 70% by 2012 as the country surpassed the U.S. as the world’s largest car market. Toyota (NYSE: TM) and Honda (NYSE: HMC) are not far behind. Everyone knows that the battle for market share is critical at the moment. Even General Motors, which is a ghost of its former self, is selling more cars in China in the first three months of 2010 than it is in the U.S. And Hitachi (NYSE: HIT), which at one point was 2% of the Japanese economy, is a huge industrial conglomerate that will also be a direct beneficiary of BRICs’ growth.

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