Japan's Return Research Articles

Liquidity and stock returns in Japan: New evidence

The liquidity/stock returns linkage was studied using data from the First Section, the Second Section, and the Mothers Section of the Tokyo Stock Exchange (TSE). In our overall tests, we found a significantly negative (positive) relationship between liquidity (illiquidity) proxies and returns. Upon exploring this further for the impact of business cycles, we found that while the expansionary phases largely confirm the overall finding, contractionary phases do not. When we controlled for liquidity variability in the cross-sectional regressions, the role of the liquidity level showed strong significance across business cycles, different subperiods and all Sections of the TSE. With regard to liquidity variability, we observed a strongly significant and negative association with stock returns.

Capital Investments and Stock Returns in Japan*

ABSTRACTThe negative relation between capital investments and subsequent stock returns, found in the United States, is not observed in Japan, which is inconsistent with the risk‐based explanation. More specifically, we find no significant relation between capital expenditures (CE) and subsequent stock returns for either the entire sample or for keiretsu firms. However, in the pre‐1990 subperiod, there is a positive relation between increased CE and subsequent risk‐adjusted returns among independent firms, especially for those firms that have high cash flows and/or low leverage. These results are consistent with existing evidence that independent firms are financially constrained in the pre‐1990 period and that keiretsu main bank monitoring effectively controls the overinvestment problem.

Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan (review)

Reviewed by: Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan Frederick R. Dickinson (bio) Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan. By Mark Metzler. University of California Press, Berkeley, 2006. xxiv, 370 pages. $49.95. Japan specialists looking for a potent lesson in modern history need look no further than Lever of Empire. With his focus alone, Mark Metzler (University of Texas at Austin) commands one of the most authoritative new voices on modern Japanese history. He is, after all, the first American Japan scholar in recent years to begin a professional career tackling matters of economy. As such, his work is of immediate value for many Japan specialists in this country who remain largely ignorant of economic issues (this reviewer included). [End Page 540] This primer is especially useful because it highlights the international gold standard within a framework easily recognized by Japan specialists. Unlike many postwar pioneers of Japanese economic history, Metzler is concerned less with patterns of economic development per se than with what those trends say about the Japanese nation, empire, and party politics. Through the prism of international finance, we obtain a powerful new glimpse at nation building, imperial expansion, and the ultimate decline of liberalism in Imperial Japan. Metzler offers first a novel look at the birth of a modern nation. Specialists have unearthed ample evidence of "sprouts of capitalism" in Tokugawa Japan—urbanization in Edo, commercialization surrounding post stations, advanced literacy, etc. Lever of Empire adds to this picture the story of early "monetary modernity." Fifty years before Britain fully realized such a measure, the bakufu in 1772 instituted a "partial gold standard." It circulated, along with silver-by-weight currency, gold-denominated silver coins valued not by weight in silver but by a face value given in terms of gold ryō. Financial developments accentuate the drama of Japan's transition from a feudal to a modern state. Meiji specialists continue to stress official reluctance to open Japanese capital markets in the latter nineteenth century. But, while the Tokugawa "partial gold standard" depended upon financial isolation, the intrusion of Western power not only destroyed that standard, it spurred Japanese integration into an international monetary regime through Japanese adoption of an international gold standard by 1897. Between 1897 and 1913, Japan was the single largest state borrower on the London money markets. If Metzler raises new appreciation for the internationalization of the Meiji state, he echoes recent efforts by Peter Duus, Robert Eskildsen, and Alexis Dudden to do the same for early Japanese empire building. Adopting the gold standard produced economic effects in Japan equivalent to Fukuzawa Yukichi's famous appeal for a "departure from Asia": it stabilized trade with Great Britain and the United States and provoked wild fluctuations in Sino-Japanese commercial exchanges. The degree to which Japan set out in the latter nineteenth century to build "a European-style empire on the edge of Asia" (to borrow Inoue Kaoru's formulation) is accentuated by the fact that both the Sino-Japanese and Russo-Japanese Wars, even Tokyo's first forays into the competition for loans to China, were all financed in European and American capital markets. Even the annexation of Korea appears in this context as a critical component of Japan's integration into an Anglo-American global order. Korean currency reform under Japanese auspices produced the first yen-based gold-exchange standard. Korean money came to be based on a specie reserve held in Tokyo, which in turn depended on a reserve held in London. [End Page 541] Metzler's principal focus is the pivotal era of party politics in 1920s Japan. Because of its association with renewed militarism and imperialism, Japan's return to the gold standard at the inopportune moment of global depression is a familiar tale to Japan specialists. But nowhere else in English do we have such an in-depth examination of Japan's initial departure (1917) and subsequent return (1930) to the standard. It is an absorbing tale that highlights a handful of pivotal individuals within an extraordinarily global network of finance. The principal player is Inoue Junnosuke (1869...

The effect of changes in Japanese consolidation policy on analyst forecast error

Our broad research objective is to investigate whether convergence towards international standards improves the decision usefulness of information. Recent changes in Japanese consolidated reporting practices to better align with international standards provide an excellent setting to investigate this research objective. Specifically, we examine the effect of changes in Japanese consolidation policy on financial analysts’ perceptions of the persistence of subsidiary earnings. Previous research provides evidence that, prior to the change in consolidation policy, consolidated financial information was not used efficiently in the Japanese capital market. Prior research finds a positive relation between subsidiary earnings and future stock returns in Japan, indicating that investors underestimate the persistence of subsidiary earnings. Consistent with prior research using stock returns, we find that financial analysts also underestimate the persistence of subsidiary earnings in Japan. We document a significant positive relation between subsidiary earnings and future forecast errors of consolidated earnings. However, following the changes in consolidation policy in Japan, we find that financial analysts no longer underestimate the persistence of subsidiary earnings. Changes in Japanese consolidation policy in conformance with international standards increase decision usefulness by improving the ability of financial analysts to predict overall firm performance. One limitation of our research design relates to the adoption of mandated accounting policy changes by all sample firms in the same calendar time. This makes it difficult to control for the impact of correlated omitted variables. While this concern can never be completely eliminated, we provide additional tests that examine sample partitions by firm size and industry. These additional tests support the primary findings that Japan’s efforts to converge consolidation rules with international standards have improved analysts’ consolidated earnings forecasts.

Japan's Return to International Diplomacy and Southeast Asia: Japanese Mediation in Konfrontasi, 1963–66

Japan's diplomacy towards Indonesia during the period of Confrontation or Konfrontasi from 1963–66 is an important episode in postwar Japanese foreign relations for several reasons. First of all, i...

Post-War Japan and Asianism

In recent years there has been lively debate over the concept of an Asian community. Historically, however, an Asianism that espouses the notion of “Asia for the Asians” has been around for a long time. This article examines post-war Japan's return to Asia from the perspective of Asianism. The Asianism of post-war Japan was manifested in Japan's eagerness to advance into the vacuum created by the withdrawal of the Western European nations from Southeast Asia. However, this came up against Asia's own brand of Asianism, which emphasized independence first and foremost. It was the loss of its underpinnings by this latter brand of Asianism, as from 1970 onward, colonial rule and the political leaders who shouldered independence disappeared from the face of Southeast Asia, that lent impetus to Japan's advance into the region.

Financial Disclosure and Speculative Bubbles: An International Comparison

The paper examines if a country's financial disclosure system affects the likelihood of speculative bubbles. We compare stock returns of eight countries that differ in the quality of their disclosure systems as ranked by Saudagaran and Biddle (1992). We examine the hypothesis that stock prices of firms in countries with a low level of financial disclosure are more prone to speculative bubbles. We employ the duration dependence model developed by McQueen and Thorley (1994) to test for the presence of bubbles. We found that returns in Japan, a country with a relatively low level of disclosure, shows evidence of a bubble.

Stock Return Cross-Autocorrelations and Market Conditions in Japan

In this paper, we show that changes in market conditions significantly affect cross-autocorrelations in short-horizon stock returns in Japan. We find strong (weak) cross-autocorrelations between returns on small firms and lagged returns on large firms following periods of aggregate market losses (gains). This asymmetric effect of lagged market state on cross-autocorrelations cannot be explained by market micro-structure biases such as non-synchronous trading and thin trading. Further analyses suggest that lack of aggregate trading activity following periods of market decline contribute to the delays in registering negative market-wide information in stock prices, particularly for small stocks.

Corporate Groups, Capital Investments and Stock Returns in Japan

This paper presents evidence that suggests that in Japan, corporate ownership structure affects the relation between capital investment expenditures and firm performance. Specifically, there is a negative relation between capital expenditures and subsequent risk-adjusted returns amongst keiretsu firms, which have a strong banking relationship, but a positive relation amongst independent firms. There is no relation between these returns and financial constraints for keiretsu firms. However, the positive relation between capital investments and stock returns for independent firms is strongest for those firms that have the lowest cash flows, and are thus likely to be the most financially constrained.

International unsecuritized real estate

Given the paucity of good international unsecuritized real estate data and the growing interest in diversifying real estate only and mixed‐asset portfolios beyond national borders, this study introduces an unsecuritized Japanese total return index for office real estate dating back to 1970. Moreover, this study analyses risk and return characteristics and compares them with the risk and return characteristics of US domestic unsecuritized office real estate. The results indicate that first, National Council of Real Estate Investment Fiduciaries (NCREIF) and the Mitsubishi Trust and Banking Corporation and IKOMA Data Service System Co. Ltd (MTB‐IKOMA) geographic region returns are generally from a normal distribution, although neither is without exception; second, all ten sub‐indices suffer from autocorrelation at two or three lags even after lower‐order effects have been removed; third, returns in Japan are historically higher, although so too are the risks; and most importantly fourth, while returns within Japan and the USA, separately, are highly correlated, correlation between Japan and the USA is quite low. In sum, given the results of this study, it is likely that Japanese unsecuritized real estate could be used to diversify international real estate only, and mixed‐asset portfolios.

Demand Uncertainty and Resale Price Maintenance

When retailers must commit to shipment quantities prior to resolution of demand uncertainty, manufacturer stipulation of a minimum retail price is likely to be profitable for the manufacturer, and not damaging to the retailers. The reason is simple: If demand turns out to be low, the unfettered market-clearing price can lie below the price that maximizes total sales revenue. A minimum retail price that is binding in the low demand state can thus increase total revenue even though it saddles retailers with unsold merchandise. The ubiquity of full reimbursement for returns in Japan even though it is in theory merely a second-best way of achieving minimum retail price stipulations, reveals important aspects of manufacturer maintenance of retail prices having to do with enforcement problems, the allocation of risk-bearing and economic incentives. These aspects of resale price maintenance are relevant to the normative evaluation of the special exemptions for RPM that Japan's Fair Trade Commission has long maintained but is now phasing out.

DEMAND UNCERTAINTY AND RESALE PRICE MAINTENANCE

When retailers must commit to shipment quantities prior to resolution of demand uncertainty, manufacturer stipulation of a minimum retail price is likely to be profitable for the manufacturer and not damaging to the retailers. The reason is simple: if demand turns out to be low, the unfettered market‐clearing price can lie below the price that maximizes total sales revenue. A minimum retail price that is binding in the low‐demand state can thus increase total revenue even though it saddles retailers with unsold merchandise. The ubiquity of full reimbursement for returns in Japan, even though it is in theory merely a second‐best way of achieving minimum retail price stipulations, reveals important aspects of manufacturer maintenance of retail prices having to do with enforcement problems, the allocation of risk‐bearing, and economic incentives. These aspects of resale price maintenance (RPM) are relevant to the normative evaluation of the special exemptions for RPM that Japan's Fair Trade Commission has long maintained but is now phasing out.

A Comparison of Relations Between Security Market Prices, Returns and Accounting Measures in Japan and the United States

AbstractWe examine associations between accounting measures of earnings and stock returns in Japan over varying window lengths and compare them to those for the United States. Our results are consistent with the view that Japanese investors utilize less accounting information in their pricing of equities than do their U.S. counterparts. This was particularly evident in the ‘boom’ period of the mid to late 1980s when the fundamental values conveyed by accounting measures appear to have been largely ignored. The association increases with the inclusion of 1991, suggesting a return to more emphasis on fundamentals with the recent decline in stock prices.