We examine the Japanese stock market response to addition to the Nikkei 225 Index during the period from 1991 to 2002. Much as in the case of the U.S. markets, the stock prices of added firms go up on the announcement date, continue to increase until one day prior to the effective change date, and then decrease on the change date. We identify that the stock price increase in the run-up period (between the announcement date and the change date) is temporary, because it is completely canceled out by the stock price decline following the change date. We also find that the excess demand of index-arbitrageurs for shares of newly added firms is the main source of the temporary stock price increase.

We report on a seasonal pattern that has persisted in the Japanese stock market for more than half a century: mean stock returns are significantly positive for months during the first half of the calendar year and significantly negative for months during the second half. Dubbed the "Dekansho-bushi effect," this seasonality is independent of other known calendar anomalies, such as the so-called January effect. The Dekansho-bushi effect should be distinguished from the "sell in May effect," since Japanese stocks perform well in June and poorly in November and December. The Dekansho-bushi effect varies in magnitude among firms and is particularly significant among small firms with low book-to-market ratios. Nonetheless, the effect exists, regardless of a company's size or book-to-market ratio.

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