Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration

This paper studies the predictability of monthly excess returns on equity portfolios over the domestic short-term interest rate in the U.S. and Japan during the period 1971:1-1989:3. The paper finds that similar variables, including the dividend-price ratio and interest rate variables, help to forecast excess returns in each country. In addition, in the 1980's U.S. variables help to forecast excess Japanese stock returns. There is evidence of common movement in expected excess returns across the two countries, which is suggestive of integration of long-term capital markets.

"The Genesis and the Development of the Pre-war Japanese Stock Market"

This paper examines the development of the Tokyo Stock Exchange since its inception in 1878 to the mid-1930s. Special attention is paid to the increases in the number of listed stocks throughout this period. By the mid-1930s, the Tokyo Stock Exchange had grown to a market bigger (measured relative to GDP) than many contemporary stock exchanges in major economies. Even compared with the stock exchanges in major countries today, the pre-war Tokyo Stock Exchange was quite large. New listings in the spot market section of the Tokyo Stock Exchange were not restricted for most of this period. Our regression analysis reveals that many firms decided to list their stocks on the Tokyo Stock Exchange as they became older and bigger. The commercial code change in 1911, which increased the protection of outside shareholders, also had a positive impact on the listings on the Tokyo Stock Exchange. The Tokyo Stock Exchange reform of 1918 that aimed at standardization of the spot transactions increased the listings on the Exchange. The analysis also suggests that in the earlier period, there was a "home bias" that the companies located in the Eastern part of Japan (closer to the Tokyo Stock Exchange) were more likely to be listed in the Tokyo Stock Exchange, but the effect diminished after the Exchange reform of 1918.

The Genesis and the Development of the Pre-war Japanese Stock Market ?Published in "Economic Review (Keizai Kenkyu)", January 2005, v. 56, iss. 1, pp. 15-29. ?

This paper examines the development of the Tokyo Stock Exchange since its inception in 1878 to the mid-1930s. Special attention is paid to the increases in the number of listed stocks throughout this period. By the mid-1930s, the Tokyo Stock Exchange had grown to a market bigger (measured relative to GDP) than many contemporary stock exchanges in major economies. Even compared with the stock exchanges in major countries today, the pre-war Tokyo Stock Exchange was quite large. New listings in the spot market section of the Tokyo Stock Exchange were not restricted for most of this period. Our regression analysis reveals that many firms decided to list their stocks on the Tokyo Stock Exchange as they became older and bigger. The commercial code change in 1911, which increased the protection of outside shareholders, also had a positive impact on the listings on the Tokyo Stock Exchange. The Tokyo Stock Exchange reform of 1918 that aimed at standardization of the spot transactions increased the listings on the Exchange. The analysis also suggests that in the earlier period, there was a "home bias" that the companies located in the Eastern part of Japan (closer to the Tokyo Stock Exchange) were more likely to be listed in the Tokyo Stock Exchange, but the effect diminished after the Exchange reform of 1918.

Japanese government bond auctions: The U.S. experience

There has been constant friction between the U.S. and Japan on economic issues. After lengthy negotiations and threats of reprisal, Japan agreed to sell its Government Bonds through auctions that were open to foreign competition. This paper examines the U.S. experience in the Japanese Government Bond (JGB) auctions. It also empirically tests the predictions of auction theory with JGB auction data. While the winning share of U.S. firms in 10-year JGB auction market went through ups and downs, their share in the 20-year market has increased steadily. We find that the winning shares by the U.S. firms are positively related to auction profits, whereas the Japanese "Big Four" winning shares show negative association. We offer some possible explanations for this phenomenon. Furthermore, the average profits to winning bids in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are found to be insignificant in determining auction profits

"Listing Policy and Development of the Tokyo Stock Exchange in the Pre-War Period"

Recent studies have established that the Japanese stock market was quite large in the pre-war period, and played an important role in financing the economic development. The pre-war stock market in Japan, however, did not achieve its size and status quickly. Indeed, the market capitalization stayed relatively small during the early years of the stock market development in Japan. This paper studies the pre-war development of the Tokyo Stock Exchange, which eventually grew to be one of the two largest stock exchanges in the pre-war Japan, and examines why the development was rather stagnant since its establishment in 1878 to the 1910s and what led to its take-off in the late 1910s. The paper argues that the TSE stayed small because the low liquidity discouraged the new companies from listing their stocks. The lack of growth in new listed stocks meant the liquidity continued to be low until 1918, when the TSE changed its listing policy to start listing companies without waiting for their listing applications. The provides empirical evidence from listing behavior of cotton spinning firms that shows the size of the market indeed mattered for their listing decision before 1918.

Idiosyncratic Risk and the Creative Destruction in Japan

The dramatic rise and fall of the Japanese equity market provides a unique opportunity to examine market-and firm-specific risks over different market conditions. The price behavior of Japanese equities in the 1990s is found to resemble that of U.S. equities during the Great Depression. Both show increasing market volatility and a prolonged large co-movement in equity prices. What is unique about the Japanese case is the surprising fall in firm-level volatility and turnover in Japanese stocks after its market crash in 1990. This large decrease in firm-level volatility may have impeded Japan's capital formation process as it has become more difficult over the past decade for both investors and managers to separate high quality from low quality firms. Using data on firm performance fundamentals and corporate bankruptcies, we show that the fall in firm-level volatility and turnover in Japanese stocks could be attributed to the sharp increase in earnings homogeneity among Japanese firms and the lack of corporate restructuring.

Listing Policy and Development of the Tokyo Stock Exchange in the Pre-War Period?(Published in Takatoshi Ito and Andrew Rose eds. "Financial Sector Development in the Pacific Rim". Chicago, IL: University of Chicago Press, pp.51-87, 2009. )

Recent studies have established that the Japanese stock market was quite large in the pre-war period, and played an important role in financing the economic development. The pre-war stock market in Japan, however, did not achieve its size and status quickly. Indeed, the market capitalization stayed relatively small during the early years of the stock market development in Japan. This paper studies the pre-war development of the Tokyo Stock Exchange, which eventually grew to be one of the two largest stock exchanges in the pre-war Japan, and examines why the development was rather stagnant since its establishment in 1878 to the 1910s and what led to its take-off in the late 1910s. The paper argues that the TSE stayed small because the low liquidity discouraged the new companies from listing their stocks. The lack of growth in new listed stocks meant the liquidity continued to be low until 1918, when the TSE changed its listing policy to start listing companies without waiting for their listing applications. The provides empirical evidence from listing behavior of cotton spinning firms that shows the size of the market indeed mattered for their listing decision before 1918.

Living with the "enemy": An analysis of foreign investment in the Japanese equity market

This paper studies the impact of foreign investment on domestic financial markets. It examines the empirical validity of some protectionist claims used by regulators to restrict foreign investment. These people argue that 1) trading by foreign investors tends to increase market volatility more than trading by domestic investors, 2) foreign investors have sophisticated investment technology to which domestic investors do not have access so that domestic investors tend to "lose" to foreign investors, and 3) foreign investors tend to be short term investors whose investments are mostly driven by expectation of short-term gains rather than long-term fundamentals such as corporate dividend growth. We find there is no evidence supporting these claims from the Japanese experience. To the contrary, we find that foreign investors tend to be long-term contrarian players in the market and their presence helps to improve liquidity in the Japanese market. Thus, our results support the hypothesis that international free flow of equity capital is beneficial to domestic markets