Bank of America is warning that Japan is facing the risk of a financial collapse.
In the latest Flow Show notes, Michael Hartnett, Chief Investment Officer at Bank of America, pointed out that Japanese government bond yields are at a 13-year high, the yen exchange rate is at a 34-year low, and the Bank of Japan holds 47% of Japanese government bonds, all of which are signals of a potential debt crisis in Japan.
To make matters worse, if Japan does eventually experience a financial crisis, it could slowly "export" its long-accumulated economic and financial problems to the rest of the world, eventually leading to a global financial system collapse.
Hartnett believes that although in the long run, investor demand for global government bonds may decline, in the short term, bonds may outperform other assets.
He pointed out that the current low holdings of bonds by investors mean there is room for further increases in the future; corporate profits may decline, making risk assets such as stocks less attractive and bonds more attractive; in addition, in the process of central banks easing monetary policy, interest rate cuts will push up bond prices.
Hartnett believes that investors should buy bonds on any pullbacks to capture potential upside opportunities.
Turning to U.S. stocks, Hartnett noted that the current breadth of the stock market has fallen to its lowest level since March 2009, mainly due to AI crowding out funds from institutional and retail investors. However, he predicts that value stocks will outperform growth stocks in the context of slowing economic growth.
