The gap between Japanese government bond yields and the TOPIX dividend yield has reached its highest level since 2007.

Source: Global Market Report

The yield on Japan’s 10-year government bonds has now risen well above the country’s dividend yield, increasing the possibility of a shift in capital from stocks to bonds once volatility in the bond market settles.

The dividend yield of TOPIX index constituents is currently about 2.3%, lower than the 10-year Japanese government bond’s composite yield of 2.75%. The gap between the two has reached its largest since 2007, a time when the Bank of Japan was in a tightening cycle.

“From the perspective of dividend yield and earnings yield, bonds are starting to look more attractive than stocks,” said Hiroshi Namioka, Chief Strategist at T&D Asset Management. “Once oil prices begin to stabilize, buying in the bond market may increase.”

In Tokyo, the yield on 30-year Japanese government bonds surged to the highest level since this maturity was introduced in 1999, while the 10-year and 20-year yields both climbed about 10 basis points, reaching highs not seen since 1996.

Given that growth stocks, which are sensitive to bond yields, have recently driven the stock market higher, the impact of rising yields is intensifying the risks faced by equities.

However, Sohei Takeuchi, Senior Fund Manager at Sumitomo Mitsui DS Asset Management Co., pointed out that as Japan enters a stage of nominal economic expansion driven by inflation, equities still look likely to remain attractive. He believes that a large-scale shift from stocks to bonds is unlikely unless Japanese government bond yields rise to levels comparable to US Treasuries.