Japan's placid bond market will slowly awaken from a deep, deflation-induced slumber. With 95 percent of Japan's government bonds owned by domestic investors, the government has been able to pay just 1 percent on 10-year bonds, despite running a debt-to-GDP ratio of 200 percent. That will change in 2012, as politicians fail to bring the deficit under control and ratings agencies take further action. As domestic savings find other channels, bond investors will wise up and hedge funds will see an opportunity. Still, the rise in yields won't trigger a crisis given Japan's large current account surplus and large pool of domestic savings. But Japan's government will finally realize its finances are running on borrowed time.

4. India will face political and economic crises.

India's rising fiscal and current-account deficits and multi-billion dollar corruption scandalswill continue to take a toll on the economy. Inflationand interest rates will remain elevated, while growth will slow. Voters will show their disapproval for the ruling party in regional elections. The government will muddle along and the year could end with a new prime minister at the helm.

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