Markets are busy speculating on which country might follow Egypt on the revolutionary road, but watch out for the impact on a country where bellies are full and the chances of revolt are exactly nil: Japan.

The same inflation in food and energy which fanned discontent in Tunisia and Egypt could badly hit real wages and purchasing power among Japanese citizens, potentially undermining their willingness to hang on to the debt which the government desperately needs them to own.

That's right, deflation could actually ease in Japan and, that's right, its demise could help tip the country into the long-awaited financing crisis.

It is not the bond market vigilantes who are likely to precipitate a debt crisis in Japan, it is Mr and Mrs Watanabe, the archetypal small saver, who have patiently held Japanese government debt in huge amounts despite very low interest rates.

It is the existence of the Watanabes (domestic holdings of Japanese debt are about 94 percent vs about 50 percent in the U.S.) who have allowed Japan to run its debt up to 196 percent of GDR trailing only Zimbabwe. By comparison, Greece’s debt to GDP ratio is just 137 percent.

With a massive and passive domestic lending base, Japan has never faced the interest rate squeeze which its long-term outlook justifies, and unlike the U.S., is far less vulnerable to sales by foreign investors or central banks. For a country, which is borrowing 50 cents of every dollar it spends, this is both a key support and a significant vulnerability.

But why have the Watanabes held

on to their Japanese bonds, which are usually held through intermediaries such as via savings products? Partly it's a matter of culture and habit, but deflation has almost certainly played a mollifying role.

Japanese domestic investors hold less than 5 percent of the government bond market directly, but are much larger investors through accounts and instruments sold by financial institutions, the yield of which track govemmentbondyields.

A paltry 1.2 percent yield on a 10-year bond is a lot easier to swallow for retirees and investors if purchasing power appears to be rising as prices fall in a deflationary spiral. If prices rise sharply they may demand more.

But that deflationary spiral, especially as it affects households, may be coming to an end courtesy of very loose US monetary policy and related strong emerging market demand.

Inflation in perishables, such as meat and fruit, hit 10.3 percent in December, and overall food prices hit an all-time record, according to Japanese data. Energy prices are moving upward as well, and are vulnerable to increasing shocks from the Middle East.

Overall, and not even depending on a falling yen, Japanese consumers look to be suffering a terms of trade shock, where their ability to command wages is left far behind by rising prices of the things they must buy.

Deflation has not been that terrible for Japanese households, at least to judge by their own reports: 63.9 percent of people said they were content with their standard of living last year, as against 63.1 percent in 1989.

The writer is a Reuters columnist. The opinions expressed are his own.