Consumption, Aggregate Wealth, and Expected Stock Returns in Japan

Abstract

This paper studies the role of fluctuations in the aggregate consumption-wealth ratio for predicting stock returns in Japan. Using quarterly Japanese stock market data, we find three main results that are different from US evidence. First, unlike in the US, fluctuations in Japan in the consumption-wealth ratio are not strong predictors of real and excess stock returns. Second, we find that the dividend yield is a much better forecaster of future stock returns at short and intermediate horizons than is the consumption-wealth ratio in Japan. This is also a different result than from the US. Third, as opposed to the US again, the relative risk-free rate in Japan shows almost no ability to predict excess stock returns in Japan, while the corresponding relative T-bill rate exhibits rather strong forecasting power for excess stock returns in the US.

Is Consumption in the United States and Japan Too Much or Too Little?

“…[10] indicated that housing effects are bigger in the United States than in Europe and Japan. [11] examined the impact of fluctuations on consumption in the United States and Japan and found the effect of the wealth ratio on predictions of stock returns in Japan. Some articles have examined the relationship between consumption and financial variables (e.g., stock prices); however, the relationship between consumption and productivity has not been examined fully.…”