Abstract
Why do Japanese households hold so few stocks? We use a quantitative life-cycle portfolio choice model to argue in favour of two main explanations. First, households have a very low level of trust in the stock market due to Japan's history of poor corporate governance. Second, stock returns to individual stockholders have been low. Before 1990, this was due to excessive fees and commissions. Since the 1990 financial crisis, the Japanese market itself has delivered low and volatile returns. Counterfactual analysis suggests that, if sustained, recent improvements in corporate governance and economic performance should lead to higher stock market participation.
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