DSEEY Daiwa Securities Group Inc Japan (PK)

TOKYO— Japanese stocks fell more than 5% and the yield on the benchmark government bond dropped into negative territory for the first time, twin signs of a flight to safety that threatened to undermine the nation's slow recovery under Prime Minister Shinzo Abe.

In afternoon trading, the benchmark 10-year government bond was yielding minus 0.005%, meaning investors were willing to lend the Japanese government money for 10 years and get back less than they put in.

It was the most dramatic consequence yet of the Bank of Japan's decision late last month to introduce negative interest on certain funds that commercial banks deposit at the central bank. The decision has pushed down yields for both short- and longer-term bonds.

"I think investors will likely test how far the yield can go down," said Daiwa Securities strategist Yukio Ishizuki. He cited speculation that the Bank of Japan would push interest rates further into negative territory, a step BOJ Governor Haruhiko Kuroda has said he is prepared to take.

Meanwhile, the benchmark Nikkei Stock Average fell more than 5%, sparked by fears of a global economic slowdown. And the Japanese yen, which is often seen by investors as a haven in times of turmoil, rose against the U.S. dollar. One dollar bought about 114.50 yen in afternoon trading in Tokyo, compared with more than ¥ 120 just after the BOJ's negative-rate move last month.

Financial stocks were especially hard-hit because of concerns about global financial stability. Japan's largest bank, Mitsubishi UFJ Financial Group Inc., lost more than 9%, and its largest brokerage, Nomura Holdings Inc., was down nearly 10%.

Hitoshi Ishiyama, chief strategist at Sumitomo Mitsui Asset Management, said the U.S. Federal Reserve's rate increase in December was still rippling through markets and creating fears about tighter money, which drove down crude-oil prices.

"Slower demand and oversupply alone don't explain those tumbles," Mr. Ishiyama said. Crude prices "are taking a hit from a major shift in monetary policy."

Low interest rates could help Japan's economy by making it easier for businesses and the government to borrow. Japan's enormous government debt, at more than 200% of gross domestic product, hasn't deterred investors from piling into government bonds.

But for the moment, the negative consequences of the market upheaval predominate. Until recently, the weak yen has powered Japanese corporate profits, in part by making the dollars they earn overseas worth more in yen. Now profits are likely to shrink, and the weak stock market may deter companies from giving employees raises during wage negotiations that are getting under way this month.

The government said on Monday that real wages declined 0.9% in 2015, the fourth straight year of decline. Shrinking wages have kept consumers cautious and prevented the virtuous cycle that Mr. Abe has sought to get the economy out of its two-decade-long sluggishness.

Next week, Japan is set to announce its gross domestic product figures for the October to December quarter. The median forecast of economists surveyed by The Wall Street Journal is for contraction of 1.2%, which would be the second contraction in three quarters.

The Bank of Japan might ease further if the yen continues to strengthen, according to Norinchukin Research Institute Chief Economist Takeshi Minami. Still, he said recent global market turbulence has been driven by anxiety over the world's economic prospects, meaning that action by a single central bank would likely have only a fleeting impact. Also, the U.S. wouldn't necessarily welcome a move from Japan to intentionally weaken the yen, he said.

Finance Minister Taro Aso expressed concern about the stronger yen, calling the rapid currency movements "rough."

Hiroyuki Kachi, Takashi Nakamichi and Kosaku Narioka contributed to this article.

Write to Peter Landers at peter.landers@wsj.com

(END) Dow Jones Newswires

February 09, 2016 01:25 ET (06:25 GMT)

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