Demographic Shifts and Asset Returns in Japan

Using monthly data this paper examines the effects of changes in the dependence ratio and M3 broad money supply in the current period on the mean and variance of stock returns and bond yields in Japan in the next period, controlling for financial crisis, stock returns in USA, unemployment rate, real exchange rate, oil prices, and industrial production. We apply the post-LASSO OLS, quantile regression, Johansen (1995) cointegration test, and GARCH processes. In post-LASSO OLS, dependence ratio for the old, financial crisis, stock returns in USA, and growth rate in M3 money supply are the significant determinants of mean stock returns in Japan. A non-linear relationship exists between mean stock returns and growth rate in dependence ratio for the young and the old, industrial production index and long-term government bond yields. The VECM identifies dependence ratio as a significant long-run determinant of mean stock prices. In GARCH, dependence ratio has no significant impact on the volatility in stock returns. OLS and quantile regressions identify financial crisis and growth rate in M3 money supply as significant determinants of long-term bond yields. Quantile regression identifies growth rates in dependence ratio for the old and M3 money supply as significant determinants of the volatility in lower tail of the conditional distribution of long-term bond yields. Thus demographic shifts and monetary easing are found to have significant effects on asset returns in Japan.