Unique Symptoms of Japanese Stagnation An Equity Market Perspective - - PowerPoint PPT Presentation

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Unique Symptoms of Japanese Stagnation An Equity Market Perspective Yasushi Hamao Jianping Mei Yexiao Xu

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Motivation

• Japan: Stagnation after collapse of bubble

– GDP growth, unemployment, and inflation – Stock market return

• Bad loan problem in the banking sector

– As much as ¥100 trillion, 18% of GDP – Major bank failures in 1997 and 1998: end of “convoy system.”

• Government :

– Slow response to economic problems – Mounting government debt – Zero interest rate policy

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GDP Growth Rate,1956-2002

• 4
• 2

2 4 6 8 10 12 14 16 1 9 5 6 1 9 5 9 1 9 6 2 1 9 6 5 1 9 6 8 1 9 7 1 1 9 7 4 1 9 7 7 1 9 8 1 9 8 3 1 9 8 6 1 9 8 9 1 9 9 2 1 9 9 5 1 9 9 8 2 1 56-73 Average (9.2%) 74-90 Average (3.8%) 91-2002 Average (0.96%)

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Unemployment Rate (%, SA)

2 2.5 3 3.5 4 4.5 5 5.5 6 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

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Inflation Rate (GDP Deflator)

• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year

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Figure 1. Cumulative Returns and Trading Volume (TSE Value-Weighted Index)

2 4 6 8 10 12 14 7501 7512 7611 7710 7809 7908 8007 8106 8205 8304 8403 8502 8601 8612 8711 8810 8909 9008 9107 9206 9305 9404 9503 9602 9701 9712 9811 9910 Date

• Cum. Ret.

Cumulative Return

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Mounting Government Debt

• New Government Debt

– FY1999 ¥37.5 trillion (7.1% of GDP) – FY2000 ¥34.6 trillion (6.5% of GDP) – FY2001 ¥28.3 trillion (5.3% of GDP) – FY2002 ¥30.0 trillion (6.0% of GDP)

• Outstanding Debt (September 2002)
• JGB ¥463 trillion (89% of GDP)
• All liabilities ¥627 trillion (130% of GDP)
• This is the highest in G7 countries
• Limits its fiscal expansion ability

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Balance of National Debt To GDP Ratio Fiscal Surplus (Deficit) To GDP Ratio

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Bad Loans Problem as an Impediment to Reform

• Rather than writing off non-performing loans,

Japanese banks tend to “ever-green” many of them

• Peek and Rosengren (2003) report some statistical

evidence for “ever-greening”

• Ever-greening creates “zombie firms”
• Problems of “ever-greening”

− Keeps the resources in zombie firms − Reduces the amount of resources available for potential new entrants − Zombie firms distort the competition

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An Equity Market View

• “Creative destruction”

– “Cleansing recessions” (Caballero and Hammour, 1994)

• What can volatility reveal?

− Market volatility − Idiosyncratic volatility (Wurgler, 2000)

Recession Poor Performance Reallocation Recovery Idiosyncratic Volatility

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Main Findings

• A sharp reduction in firm-level volatility

relative to market volatility after the Japanese market crash.

• Market-wide volatility has increased, but

there is a significant drop in the variation of systematic risk across firms.

– This is in sharp contrast with the U.S. (1962-99) results of Campbell, Lettau, Malkiel and Xu (2001).

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Data

– First and Second Sections of the Tokyo Stock Exchange (TSE). Monthly individual stock returns and volume. Annual financial statements data for book value of equity. – From 1975 to 1999. Subdivided to five 5-year

• periods. The numbers of stocks: 1174, 1275,

1368, 1521, and 1607.

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Figure 1. Cumulative Returns and Trading Volume (TSE Value-Weighted Index)

2 4 6 8 10 12 14 7501 7511 7609 7707 7805 7903 8001 8011 8109 8207 8305 8403 8501 8511 8609 8707 8805 8903 9001 9011 9109 9207 9305 9403 9501 9511 9609 9707 9805 9903 Date

• Cum. Ret.

Volume Cumulative Return Trading Volume (%)

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Measuring idiosyncratic volatility

• Direct decomposition using asset pricing

models:

– –

• Model-free, indirect decomposition (Xu and

Malkiel, 2001)

– Compute total aggregate volatility first – The aggregate idiosyncratic volatility:

–

t i t f t M i m i t f t i

R R R R

, , , , , ,

) ( ε β α + − + = −

t i t HML i HML t SMB i SMB t f t M i m i t f t i

R R R R R R

, , , , , , , , , ,

) ( ε β β β α + + + − + = −

2 TV

σ

2 TV

σ

2 Mkt

σ

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Time-varying market volatility and idiosyncratic volatility

• Summary statistics (cross-section).

– In 1990-94 for the market Model,

• SD of ß went down
• Mean of R2 went up
• Mean and SD of idiosyncratic volatility went down

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1975-79 Median 0.015 0.997 0.117 0.085 0.093 0.037 Mean 0.016 0.016 0.999 0.132 0.09 0.096 0.05 S.D. 0.033 0.01 0.58 0.095 0.036 0.037 0.049 1980-84 Median 0.012 0.951 0.086 0.081 0.085 0.027 Mean 0.013 0.014 0.996 0.103 0.087 0.091 0.04 S.D. 0.026 0.011 0.653 0.083 0.04 0.041 0.04 1985-89 Median 0.028 1.027 0.157 0.097 0.107 0.049 Mean 0.027 0.028 1.024 0.172 0.106 0.115 0.056 S.D. 0.041 0.012 0.447 0.113 0.039 0.038 0.039 1990-94 Median

• 0.004

1.016 0.538 0.076 0.116 0.022 Mean

• 0.004
• 0.004

1.011 0.513 0.08 0.117 0.027 S.D. 0.083 0.007 0.321 0.168 0.024 0.029 0.022 1995-99 Median

• 0.007

0.983 0.407 0.085 0.115 0.021 Mean

• 0.004
• 0.005

1.006 0.387 0.093 0.122 0.027 S.D. 0.075 0.012 0.519 0.188 0.039 0.049 0.024

R M βi,CAPM R 2

CAPM

σi,IV σi,TV

i

R

i

η

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Figure 2. Annualized Market Volatility, Idiosyncratic Volatility, and Trading Volume

5 10 15 20 25 30 35 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Volatility

Aggregate Idiosyncratic Volatility Market Volatility

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• Trend in volatility: Table 3.

– Aggregate stock market volatility has trended upwards over the entire sample years. But, – Firm-level volatility decreased during the 1990s.

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Model: ln(σt

) = µ + ρ ln(σt-1 ) + γ t + α1 ∆ln(σ t-1 ) + … + α 6 ∆ln(σ t-6 ) + ε t

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• R2 and correlation coefficient

– Figure 3a: R2 from market model (24-month rolling regression). – Figure 3b: Average pair-wise correlations using past 24 months data.

• Stocks in the Japanese market lost their individuality

and started to move together after 1990.

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Figure 3a. Average R2 Statistics of Returns and Turnover

0.1 0.2 0.3 0.4 0.5 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Return R

2

0.05 0.1 0.15 0.2 0.25

Return R2 Volume R2

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Figure 3b. Return and Volume Correlations among Individual Stocks

0.1 0.2 0.3 0.4 0.5 0.6 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Return Correlation

0.05 0.1 0.15 0.2 0.25 0.3

Volume Correlation

Return correlation Volume correlation

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• The U.S. in 1928-1946.

– Increased market and idiosyncratic volatilities in 1929-1933 and 1937-1938. – Increased R2 and correlations.

• U.S.: Probably due to massive “deconstruction”
• The Japanese case

– Japan: Increased market volatility but falling idiosyncratic volatility due to lack of “deconstruction.”

Comparison with the U.S. Market

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Figure 6a. Market and Idiosyncratic Volatility in the U.S. Market: 1928-1947

0.05 0.1 0.15 0.2 0.25 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 idio mkt

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Figure 6b. Correlation and R2 in the U.S. Market: 1928-1946

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 Correlation R2

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Why Did Idiosyncratic Volatility Fall After 1990?

• Lack of restructuring

– Positive relation between changes in idiosyncratic volatility and corporate bankruptcies – Sharp fall in firm-level volatility during the 1990-1996 period could be due to a lack of corporate restructuring.

• The role of keiretsu and main bank

– A decrease in economic growth tends to increase the difference of idiosyncratic volatility between non- keiretsu and keiretsu firms in 1990-96 – Similar results hold when comparing the firm-level volatility between firms w and w/o main banks tie

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Figure 4a. Bankruptcies in Japan

5,000 10,000 15,000 20,000 25,000 1 9 7 5 1 9 7 6 1 9 7 7 1 9 7 8 1 9 7 9 1 9 8 1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 in million yen Number of bankruptcies (left scale) Total amount of indebtedness (right scale)

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Figure 4b. Bankruptcies of TSE Listed Firms

1 2 3 4 5 6 7 8 9 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 500,000 1,000,000 1,500,000 2,000,000 2,500,000 in million yen Number of bankruptcies (left scale) Amount of indebtedness (right scale)

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• Homogeneous Fundamentals

– ROA’s became highly correlated in the 1990’s – Smaller variation of ROA’s for keiretsu firms than non-keiretsu firms

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Figure 5a. Ten Year ROA Correlations

0.05 0.1 0.15 0.2 0.25 Non-MB Firms MB Firms Non-Keiretsu Firms Keiretsu Firms All Firms 1980-1989 1990-1999

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Figure 5b. Standard Deviation of ROA's

0.01 0.02 0.03 0.04 0.05 0.06 0.07 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 Keiretsu Firms Non Keiretsu Firms

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Vicious Cycle?

• Lack of restructuring (bankruptcies) may

have contributed to increased co-movement

• f Japanese stocks
• This makes it difficult to distinguish the

good firms from bad ones, causing good

• nes to suffer, too
• Capital formation process may suffer from

this

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Conclusions

• Dramatically increased co-movement in

Japanese equities

• This may be caused by bailouts and the lack
• f restructuring
• Further research:

– Did reduction of efficiency affect capital budgeting? – Effect of decreased idiosyncratic risk on asset pricing