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Home Publications Blogs Beat the Press Stocks, Flows, and Abenomics

Stocks, Flows, and Abenomics

Thursday, 14 August 2014 07:05

Matt O'Brien had an interesting post in Wonkblog on the market reactions to Abenomics. O'Brien points out that the rise in Japan's stock market and the fall in the value of the yen since Abe took office are the result of market movements when Japan's markets were closed. This means that the movements in the stock market were driven by traders in Europe, the United States and elsewhere. O'Brien shows that Japan's stock market has actually declined slightly in the period when the Japanese market was open and the yen has risen in value, implying that Japanese investors don't share the views of foreign investors.

This takeaway is not quite right. It is important to remember that the outstanding amount of equity or currency vastly exceeds the amount that is bought and sold in a day or month. Japanese investors obviously noticed the dramatic rise in the stock market and the fall in the yen over the last year and a half. If they did not believe that these movements were based on solid economic foundations, presumably they would have sold their stock and bought yen in a way that offset these movements.

To see this point, imagine you had shares of stock in a company that were trading at $100 per share. Imagine you went away on vacation for two weeks, out of reach of the Internet. When you came back you discovered that the shares were selling at $150 each. If you did not believe that the higher price accurately reflected the outlook for the company's future profit potential, then presumably you would dump your shares and pocket the profit. 

This is clearly not going on in Japan. While the actions of Japanese traders may very slightly be offsetting the enthusiasm of foreign investors, for the most part they obviously share this enthusiasm or they would not be willing to hold the stock of Japanese companies at current prices.

Comments (3)Add Comment
Is this cultural rather than rational?
written by Dave, August 14, 2014 9:11
The Japanese have long invested in their own government bonds rather than investing in higher yielding foreign investments. I would assume whatever reason for that is the same reason they prefer to invest in Japanese stocks rather than other stocks.

I don't think there's a very good direct transfer from investments in stocks to investment in government bonds, at least not with smart money. Dumb money tends to provide a continuum in this way through mutual funds that can change their makeup some some obfuscated blend of such.

I'm not sure our assumptions about motivations behind investment are accurate.
written by JSeydl, August 14, 2014 11:11
Is it not possible to see whether the total volume of holdings of Japanese equities by Japanese investors has been declining since the Abe-influenced market movements?
written by JDM, August 14, 2014 11:54
Perhaps I'm wrong, but wouldn't this data likely mean that Japanese investors saw the market rise sooner and bought in earlier, with American and Europeans investors playing catch up?

It certainly doesn't seem likely to mean what O'Brien said.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.