Abstract
We investigate systematic factors driving stock returns and stock return predictability in Japan. We find that dividend yield, cash-flow yield, and industrial production are systematic pricing factors after controlling for market, value, and size while other macroeconomic factors are not. Value and size premiums become insignificant after adding the industrial production factor to market, value and size factors because the value factor captures the changing fundamentals of Japan's macroeconomic development. For predicting stock returns, our tests using Fama-MacBeth (1973) regressions accept the models of both factor and characteristics for a stock’s cash-flow yield, and a characteristics model for a stock's short-term reversal, dividend yield, and earnings yield.
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