Home Bias in Japan

Abstract

An apparent preference for domestic over foreign assets, or “home bias,” has been a conspicuous feature of the behavior of many investors in Japan, both individual and institutional. This home bias has declined markedly in the past decade by some measures, but remains higher than average for mature market countries. To the extent that a strong revealed preference for domestic assets in Japan results in a suboptimal allocation of financial assets, it would represent an unexploited opportunity for higher returns on investment in a country that has recently suffered from low rates of return, and that faces the prospect of having to cover a large funding gap in social security programs. From a global perspective, an inefficient portfolio held by Japanese investors could have consequences for the prices of foreign and domestic assets.