The Stock Market and Macroeconomic Factors in Japan and Policy Implications

This paper finds that the Japanese stock market index is positively affected by industrial production, is negatively associated with the ratio of the government deficit to GDP, the domestic real interest rate and the expected inflation rate, and exhibits a nonlinear relationship with the ratio of M2 to GDP or the nominal effective exchange rate. Increased M2/GDP ratio would raise (reduce) the stock market index if the M2/GSP ratio is less (greater) than the critical value of 100.87%. An appreciation of the yen would increase (reduce) the stock market index if the nominal effective exchange rate is less (greater) than the critical value of 52.44. To promote a robust stock market, the authorities are expected to pursue economic growth, fiscal discipline, and a relatively low interest rate and expected inflation rate. Too much money supply relative to GDP or continual appreciation of the yen would impair the Japanese stock market index.