Japanese and German government bonds could make further capital gains despite ultra-low yields, according to the chairman of Lombard Street Research.
Charles Dumas writes in a daily research note that the Japanese economy is unlikely to strengthen as a result of recent quantitative easing and a lowering in interest rates from 0.1% to 0-0.1%. The business sector will still have no incentive to spend its massive cash reserves, he says, while the household sector still has “bags of liquidity”, at 1.5 times GDP and 2.5 times disposable income.
“The problem is that Japanese businesses hog the income and then waste it on low-return investment, rather than getting it out where it belongs – to people. Given Japan’s slow economic growth, its business needs a lesser share of income than the US, not more,” Dumas says. (article continues below)
“Getting rid of deflation is the goal, first requiring domestic demand to grow. The problem will not be solved until Japan takes on its corporate, cash-hoarding behemoths.”
Dumas is also positive on German bunds following German export data, which showed a second month of slight decline. He says the country’s domestic demand remains feeble and a fair third quarter could be followed by prolonged GDP stagnation, creating a stronger environment for government bonds.