2.75% vs 2.3%! Japanese bond yields crush stock dividends, capital rotation imminent?

The yield on Japan's 10-year government bonds has significantly exceeded the dividend yield, leading people to expect that once the volatility in the bond market subsides, funds may flow from the stock market to the bond market. Data shows that the dividend yield of the constituents of the TOPIX Index is currently around 2.3%, lower than the compound yield of Japan's 10-year government bonds at 2.75%. The gap between the two is the largest since the Bank of Japan implemented tightening measures in 2007. The difference between the 10-year Japanese government bond yield and the TOPIX Index dividend yield is the largest since 2007. Hiroshi Namioka, Chief Strategist at T&D Asset Management, said, "From the perspective of dividend yield and earnings yield, bonds are becoming more attractive than stocks." He added, "Once oil prices stabilize, bond purchases may increase." Due to the impact of U.S. President Trump's increased pressure on Iran to end the war, oil prices continue to rise, and concerns about rising inflation persist, leading to an escalating sell-off of global bonds. On Monday, Japanese government bond prices continued to fall, with the yield on 30-year Japanese government bonds soaring by 20 basis points, reaching the highest level since the issuance of 30-year government bonds in 1999. This led to a rise of about 10 basis points in the yields of 10-year and 20-year Japanese government bonds, reaching the highest level since 1996. At the same time, the yield on 30-year U.S. Treasury bonds briefly rose by 4 basis points, reaching 5.16%, the highest level since October 2023. The yields on 10-year and 2-year U.S. Treasury bonds reached 4.63% and 4.10%, respectively, both hitting the highest level since February 2025. Australian and New Zealand government bond prices also fell in tandem. As growth stocks, sensitive to bond yield, drove the Japanese stock market higher, higher yields exacerbated the risks faced by stocks. However, Sohei Takeuchi, Senior Fund Manager at Sumitomo Mitsui DS Asset Management, said that as Japan enters a phase of nominal economic expansion under inflationary pressures, stocks may still remain attractive. He believes that unless Japanese government bond yields rise to levels similar to U.S. Treasury bonds, a large-scale shift of funds from stocks to bonds is unlikely to occur.