Rising Bond Yields Pose Risk to Japan's Stock Market

Japan's bond yields are expected to rise due to concerns over the country's expansionary fiscal policy, according to Shusuke Yamada, head of Japan FX and rates strategy at BofA Global Research.

The market was anticipating the Bank of Japan (BOJ) to increase short-term interest rates, and Yamada believes that expectations for faster BOJ rate hikes have been strengthened after the comments from Japanese financial leaders at the G20.

Yamada thinks that the 10-year bond yield could go higher, potentially stabilizing slightly above 3% in the long term. However, he warns that this could pose a risk to the stock market if investors seek more attractive returns.

Currently, the equity dividend yield for Japan's TOPIX index is around 2%, which is lower than the 10-year government bond yield. As interest rates rise, Yamada predicts that this could trigger a meaningful correction in the equity market, particularly if yields move above 3.5% or beyond.