The Japanese market and the economic environment*

Abstract

S ince the War, the Japanese economy has been able to maintain a high growth rate. Among the conditions for such a growth, we cannot ignore the important role of the financial market.' Although post-war Japanese financial intermediation relied mostly on the flow of funds through the banking sector, there has been little research that deals with the securities market.' Since the oil crisis, however, the Japanese financial structure has drastically changed because of large issues of government bonds, so that the function of the securities market has rapidly become more important than before. Therefore, it is important to survey the Japanese securities market with the hope that it will be a starting point for this kind of research. In this paper, we shall focus on the stock market and examine its function from the macroeconomic point of view. The objective of our analysis is to clarify whether or not the price mechanism works in the Japanese stock market. The answer to this question provides a foundation for what is to follow, which will include a test of the Capital Ass& Pricing Model and the measurement of the cost of capital. First, we will survey the character of the Japanese stock market. We will then investigate the effectiveness of the price mechanism from two aspects, i.e., from the standpoint of allocational efficiency and from that of informational efficiency. Finally, we will present some concluding remarks.