Japanese Financial Market Research: A Survey

• Author: Yasushi Hamao
• Date: 01 June 2018
• Published date: 01 June 2018
• DOI: http://doi.org/10.1111/ajfs.12214

Japanese Financial Market Research:

A Survey*

Yasushi Hamao**

Columbia Business School, United States and Schwarzman College, Tsinghua University, China

Received 31 January 2018; Accepted 14 February 2018

Abstract

This article provides a survey of research conducted in Japanese financial markets. Until the

1990s, the academic discipline of financial economics was almost not taught in Japanese uni-

versities. A few of the first-generation papers were simply replicating what was done in the

US, but many strong papers utilizing unique institutional differences were soon published.

Japan also experienced a financial and real estate bubble in the 1980s and it took close to

two decades to recover from the collapse of that bubble. Some lessons from that experience

are noted in this paper.

Keywords Japanese financial markets; Empirical study

JEL Classification: G0, G2, G3

1. Introduction

Japanese stock market capitalization as at the end of 2016 was US$4.955 trillion,

making it the third largest in the world after the US (US$27.352 trillion) and

China (excluding Hong Kong, US$7.321 trillion). (World Bank). In terms of

number of listed firms, Japan had 3541 companies at the end of 2016 (World

Federation of Exchanges). At the top of this list was India (5821), followed

by the US (5204). These numbers indicate that Japanese stock markets play a

very important role in world finance dynamics. With regard to government

and corporate debt, Japan also has (particularly in government debt) a huge

outstanding volume.

Japanese security markets have come a long way since their inception, even if

we limit our focus to the events and associated policies, regulations, and deregula-

tions that occurred after World War II. In the late 1980s, Japanese markets were

considered “hot” and general and academic interest in them was high. At that time,

*The author thanks the Associate Editor and Ken A. Hamao for their comments and suggestions.

**Corresponding author: Columbia Business School, 61 West 62nd Street, 9C, New York, NY 10023,

United States. Tel: +1-310-717-0503; Fax: +1-310-450-5875, email: yasushi.hamao@aya.yale.edu

Asia-Pacific Journal of Financial Studies (2018) 47, 361–380 doi:10.1111/ajfs.12214

©2018 Korean Securities Association 361

Japan experienced a huge asset price bubble. Elton and Gruber (1989) and Ziemba

et al. (1991) provide an overview of Japanese market research up to the late 1980s.

But after the bubble burst (in 1990 for stocks and 1991 for real estate) and the

ensuing “lost decade” of economic stagnation, interest—especially in the West—

waned. Now, the market has more than doubled in the last five years, and several

important changes in regulations and reforms are expected. Thus the Japanese

financial market is a worthy subject of study.

This review of Japanese financial market research includes more recent studies

and is confined to English-language literature only.

2. The Long Past

Japanese securities markets go back as far as the Edo period (1603–1868). In 1730,

the Edo Government established the Dojima Rice Market in Osaka. This was the

world’s first organized futures market and was created to help ease the deterio rating

finances of the samurai class, who were paid in rice, due to low rice prices (Moss

and Kintgen, 2010).

Japan rapidly industrialized during the Meiji period (1868–1912), and the Tokyo

Stock Exchange (TSE) was established in 1878. As industrialization progressed in

regional areas, 11 local stock exchanges were eventually created. Data on stock prices

from this period are difficult to obtain and thus studies are virtually non-existent.

After around 1915, some market data became available in hard copy. Until the

end of World War II, stocks were traded. After the War, in 1949, stocks resumed

trading on the TSE.

Hamao et al. (2009) examine the listing policy and development of the TSE in

the pre-war period (at this time the Osaka and other smaller regional exchanges

were also trading) and find that, by the 1930s, the Japanese stock markets were

large even compared with those in the US. They were also much more market-

oriented, in contrast with the regulated and bank-centered capital markets that

existed for many years in post-war Japan (1949–ca. 1975).

Figure 1 shows the trading volume and capitalization of pre- and post-war Japanese

exchanges divided by GNP (GDP, when available). It reveals that Japanese stock markets

in the pre-war period were both active and large compared to the size of the economy.

Table 1 compares similar statistics for Japan and the US in 1936. The US GNP

per capita dwarfs that of Japan, but both the relative size and activity of the stock

market are much larger in Japan.

3. General Overview and Data

Financial market data, accounting data, and data from company filings are all avail-

able, as they are in the US. Data collection did not begin until the 1960s, and two

studies by Hamao (1989, 1991) were the first to present summary statistics.

Figure 2 (note that the Yaxis is in log scale) is an updated version of these series

Y. Hamao

362 ©2018 Korean Securities Association