Rotation signal between stocks and bonds! Japanese government bond yields surpass dividend yields, with the interest rate gap reaching the largest since 2007

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The yield spread between Japanese government bonds and stock dividends has widened to its highest level in nearly two decades, prompting significant market attention to the potential shift of funds from equities to bonds.

The compounded yield on Japan’s 10-year government bonds is currently around 2.75%, while the dividend yield for TOPIX index constituents is about 2.3%. The difference between the two has now widened to the highest since 2007, when the Bank of Japan was in a rate hike cycle.

Hiroshi Namioka, chief strategist at T&D Asset Management, said, "From both dividend yield and earnings yield perspectives, the appeal of bonds is beginning to surpass that of stocks."

The widening spread is driven by recent sharp volatility in Japan’s bond market. In Tokyo, yields on 30-year JGBs have surged to the highest since that maturity was first issued in 1999. Yields on the 10-year and 20-year bonds have also risen about 10 basis points, both reaching highs not seen since 1996. The rapid yield rise is increasing pressure on interest rate-sensitive growth stocks, which had previously been a major driver of the rebound in Japanese equities.

Rising Bond Appeal, Pressure on Growth Stocks

As JGB yields continue to climb, the value of allocating to bonds over stocks is becoming more apparent. Namioka notes that once oil prices stabilize, buying interest in bonds is likely to return. This suggests that the current high volatility in the bond market remains the main barrier to a large-scale flow of funds—investors are likely to stay on the sidelines until the bond market becomes more stable, rather than jumping in rashly.

The historical reference from 2007 is significant. At that time, the Bank of Japan was in a rate hike cycle and government bond yields similarly outpaced stock dividend yields, eventually triggering some degree of rebalancing between stocks and bonds. The current macro environment—Bank of Japan’s gradual exit from ultra-loose policy, persistent inflation—bears some resemblance to that period, making the comparison more valuable.

The rise in bond yields is having a structural impact on the stock market. Because growth stock valuations are highly dependent on low discount rate assumptions, rising interest rates directly compress their theoretical value. Growth stocks sensitive to bond yields had previously driven TOPIX higher, so the rapid yield climb now presents a clear downside risk to the broader stock market.

From a market logic perspective, when bond yields overtake dividend yields, investors can earn higher fixed returns without bearing the volatility risk of stocks. This fundamentally undermines the traditional allocation logic of “stocks over bonds.” The pressure to rebalance is especially notable for institutional investors pursuing stable returns.

However, despite the signal from the bond-equity yield spread, some market participants believe stocks’ long-term appeal remains fundamentally unchanged. Sohei Takeuchi, senior fund manager at Sumitomo Mitsui DS Asset Management, said that as Japan’s economy enters a phase of nominal expansion driven by inflation, equities will remain attractive. He believes that unless JGB yields rise to levels comparable to those of the U.S., there is little chance of a major shift of funds from stocks to bonds.

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