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Exchange rate and stock prices in Japan

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  • Tetsushi Homma
  • Yoshiro Tsutsui
  • Uri Benzion

Abstract

This paper explores whether export intensity and net foreign position of the Japanese firms are carefully watched by investors and are properly reflected in the stock prices. By estimating a multifactor model including the TOPIX, the call rate, the exchange rate, and other variables representing the characteristics of individual firms, the market efficiency of the Japanese stock market has been examined. Novelty of this paper is in that the channels of the effect of exchange rate on stock prices are explicitly formulated and estimated directly, and in that the use of daily data enables knowledge to be gained on the market efficiency. The main results are as follows: (i) Japanese investors adequately consider the characteristics of the firms, such as the exporting behaviour and net foreign position. (ii) The market efficiency of the semistrong form has been improved throughout the period. (iii) Stock investors correctly evaluate firms' foreign asset position and appropriately respond to the change of the exchange rate after 1992. In contrast, investors began to pay attention to exporting firms much earlier, that is, since 1985.

Suggested Citation

  • Tetsushi Homma & Yoshiro Tsutsui & Uri Benzion, 2005. "Exchange rate and stock prices in Japan," Applied Financial Economics, Taylor & Francis Journals, vol. 15(7), pages 469-478.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:7:p:469-478
    DOI: 10.1080/09603100500056668
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    Cited by:

    1. Anthony Goerzen & Stephen Sapp & Andrew Delios, 2010. "Investor Response to Environmental Risk in Foreign Direct Investment," Management International Review, Springer, vol. 50(6), pages 683-708, December.
    2. Yutaka Kurihara, 2016. "Deterministic Elements of Japanese Stock Prices under Low Interest Rates," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 4(2), pages 24-30, April.
    3. Robin H. Luo & Thi Kim Anh Nguyen, 2012. "Dependence Structure of Equity and Foreign Exchange Markets: Evidence from Industrialized Asian Economies," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 2(1), pages 1-17.
    4. Yau, Hwey-Yun & Nieh, Chien-Chung, 2006. "Interrelationships among stock prices of Taiwan and Japan and NTD/Yen exchange rate," Journal of Asian Economics, Elsevier, vol. 17(3), pages 535-552, June.
    5. Yutaka Kurihara & Shinichiro Maeda, 2019. "Do Volatility Indexes and Historical Volatility Influence Stock Prices? The Japanese Case," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 9(6), pages 1-6.
    6. Mr. Fei Han & Mr. Niklas J Westelius, 2019. "Anatomy of Sudden Yen Appreciations," IMF Working Papers 2019/136, International Monetary Fund.
    7. Salah A. Nusair & Jamal A. Al-Khasawneh, 2022. "On the relationship between Asian exchange rates and stock prices: a nonlinear analysis," Economic Change and Restructuring, Springer, vol. 55(1), pages 361-400, February.
    8. Hsiang-Hsi Liu & Robin K Chou, 2016. "A Comparative Study of the Taiwan and Japan Equity and Foreign Exchange Markets: Modeling, Estimation and Application of the Component Garch-in-Mean Model," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(5), pages 277-297, May.
    9. Tsutsui, Yoshiro & Hirayama, Kenjiro, 2004. "Are international portfolio adjustments a cause of comovements in stock prices?," Pacific-Basin Finance Journal, Elsevier, vol. 12(4), pages 463-478, September.
    10. Yau, Hwey-Yun & Nieh, Chien-Chung, 2009. "Testing for cointegration with threshold effect between stock prices and exchange rates in Japan and Taiwan," Japan and the World Economy, Elsevier, vol. 21(3), pages 292-300, August.
    11. Koichiro Moriya & Akihiko Noda, 2023. "On the Time-Varying Structure of the Arbitrage Pricing Theory using the Japanese Sector Indices," Papers 2305.05998, arXiv.org, revised Mar 2024.

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