The yield on the benchmark 10-year JGB fell to an eight-month low of 1.610 percent on Monday, as cash-rich investors put their money into such minimal-risk assets. "Recent declines in domestic stock prices raised concern over the economic outlook, as business sentiment may cool, and that has supported bond buying," said Hiroshi Masuya, general manager of Mitsui Marine Asset Management.

The Benchmark Nikkei 225 stock average has in recent days been hovering around 16,500 points, against a 40-month peak of 20,833.21 on April 12. A dealer at a major city bank said: "Foreign investors in particular have been taking money out of stocks and putting it in bonds due to political uncertainty before the general election."

Japanese voters go to the polls on Sunday.

"As long as investors' asset allocation does notchange, we will see the weight of their money pushing yields lower," said Toshiro Yanagiya, fixed-income trading manager at Nippon Credit Bank. Many bond market traders expected it was only a matter of time before the key 10-year cash yield fell below 1.6 percent and predicted it would dip near 1.55 per cent this week. Some even said it could fall to 1.50 per cent by the end of the month.

Traders also said the prospect of the Bank of Japan (BOJ) lifting its 16-month-old zero interest rate policy would have little impact on the bond market.

"We expect to see the yield curve flattening further as the short-end of the curve rises in correspondence to expectations of a rise in short-term interest rates," an analyst at a Japanese brokerage said.