(Bloomberg) -- China’s benchmark bond yield is poised to fall below Japan’s, a historic crossover that may reignite fears the world’s No. 2 economy is sliding into the deflationary spiral that paralyzed its neighbor in the 1990s.

The yield on China’s 10-year bond is hovering near the lowest in more than two months as underwhelming economic data and losses in the stock market prompt investors to seek the safety of sovereign debt. On the other hand, Japanese yields of a similar tenor have surged to the highest since 2008 on concern that the government’s spending plans will fuel inflation and add to the country’s already-heavy debt burden.

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These opposing yield trends signal a stark reversal of economic fortunes: investors are now pricing in a structural shift where China inherits Japan’s former mantle of chronic stagnation, while Tokyo finally shakes off decades of deflation. The dynamic also underscores weaker confidence in Beijing’s ability to revive domestic consumption, as trade tensions with the US weigh on its export engine.

The bond market is already reflecting this shift as China’s 10-year yield was indicated at 1.81%, while that of Japan stood at 1.77%. The gap between the two has shrunk to the smallest on record.

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While the current narrow gap is historic, it’s driven primarily by Japan’s surging yield rather than a sharp fall in China’s rates, a move that nonetheless threatens to rewrite the investment playbook for Asia’s two largest economies. This shift is already being observed as overseas investors’ holdings of Japan’s government bonds rose to the highest since 2022 in the second quarter of this year.

“The fundamental economic trends point upward for Japan’s yields and downward for China’s,” said Miki Den, a senior rates strategist at SMBC Nikko Securities Inc. “With Japan’s 10-year yield set to surpass China’s, I expect the flow from China into Japan to increase going forward.”

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