RECOGNITION OF FOREIGN EXCHANGE RISK IN THE JAPANESE STOCK MARKET

Abstract

This paper examines the exchange risk sensitivity of Japanese firms, and the exchange risk pricing in the Japanese stock market for the period of 1975–2001. We find that an appreciation of the yen is positively associated with industry portfolio returns. This supports the dominance of wealth effects over cash flow effects. This is in contrast to U.S. studies that report a weak, negative relationship between stocks and the domestic currency. The results are more pronounced in the pre-Crash period, and vary somewhat depending on the exchange risk measures used. Similarly, the exchange risk is priced in the pre-Crash period, but not in the post-Crash period. These results suggest that the exchange rate elasticity of the Japanese economy has declined in the post-bubble period of economic stagnation.

Citation

Choi, J.J., Hiraki, T. and Takezawa, N. (2003), "RECOGNITION OF FOREIGN EXCHANGE RISK IN THE JAPANESE STOCK MARKET", Choi, J.J. and Hiraki, T. (Ed.) The Japanese Finance: Corporate Finance and Capital Markets in ... (International Finance Review, Vol. 4), Emerald Group Publishing Limited, Leeds, pp. 461-478. https://doi.org/10.1016/S1569-3767(03)04022-6