Unique Symptoms of Japanese Stagnation: An Equity Market Perspective


  • We would like to thank Stephen Brown, Jennifer Carpenter, Kalok Chan, Lewis Chan, Gregory Chow, John Griffin, John Heaton, Jean Helwege, David Hirshleifer, Burton Hollifield, Douglas Joines, Andrew Karolyi, Donna Keyser, Burton Malkiel, René Stulz, Jessica Wachter, Karen Wruck, Jeff Wurgler, and participants at NBER Japan Project Meeting, 13th Annual Conference in Financial Economics and Accounting at University of Maryland, and seminars at City University of Hong Kong, Hong Kong University of Science and Technology, New York University, Ohio State University, University of Southern California for helpful discussions and suggestions. We are grateful to Kenneth West, the editor, and two anonymous referees for helpful comments. Jianping Mei's research is supported by China National Science Foundation Grant No. 70440420136 and Cheung Kong Graduate School of Business research grant.


This paper documents several unique financial symptoms of Japanese economic stagnation in the 1990s. We find a surprising fall in firm-level volatility and turnover in Japanese stocks after the market crash in 1990. These results stand in sharp contrast to the U.S. case, where firm-level volatility generally increases after a market crash. Further analysis reveals a parallel sharp reduction in earnings heterogeneity among Japanese firms. Preliminary evidence suggests that the reduction in firm-level volatility may be related to Japanese business group protection. The large decrease in firm-level volatility may impede the equity market's information role, as it has made it more difficult over the past decade for both investors and managers to distinguish high quality from low-quality firms.