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Japan Premium and Stock Prices: Two Mirrors of Japanese Banking Crises

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  • Takatoshi Ito
  • Kimie Harada

Abstract

This paper investigates how financial troubles among Japanese banks in the second half of the 1990s were viewed by the market. Two indicators, the Japan premium and the stock price index of the banking sector in Tokyo, were examined. Econometric tests were employed to see whether different kinds of investors saw the banking crisis differently, and what kind of news had most impacts on market pricing of Japanese banks. Our findings are as follows. (1) Factors that pushed up the Japan Premium most were the Daiwa Bank incidence in the fall of 1995, failures of large financial institutions in November 1997, and uncertainties in the resolution of banking problem in fall 1998. (2) The bank stock index declined (in relative to the general stock index) most in bank failures, in particular by the Yamaichi Securities failure in November 1997. (3) Individual failures of financial institutions may or may not have impact on other banks' stock prices. (4) The bank stock index and the general stock index historically had co-movements, but the structural changes occurred in the co-movement relationship at around the summer of 1995. (5) News that affected Japan premium and bank stocks are sometimes different. The bank stock price index Granger-causes the Japan premium, but the reverse does not hold. The result is consistent with the view that Japan premium reflects both domestic structural problems and banks' liquidity problem in the euro dollar market, while the bank stock prices reflect the former only.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7997.

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Date of creation: Nov 2000
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Publication status: published as as "Credit Derivatives Premium As A New Japan Premium," Journal of Money, Credit and Banking, Vol. 36, no. 5 (October 2004): 965-968
Handle: RePEc:nbr:nberwo:7997

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References

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  1. Takatoshi Ito & Kimie Harada, 2003. "Market Evaluations of Banking Fragility in Japan: Japan Premium, Stock Prices, and Credit Derivatives," NBER Working Papers 9589, National Bureau of Economic Research, Inc.
  2. Gregory, Allan W. & Nason, James M. & Watt, David G., 1996. "Testing for structural breaks in cointegrated relationships," Journal of Econometrics, Elsevier, Elsevier, vol. 71(1-2), pages 321-341.
  3. Joe Peek & Eric S. Rosengren, 1998. "Determinants of the Japan premium: actions speak louder than words," Working Papers, Federal Reserve Bank of Boston 98-9, Federal Reserve Bank of Boston.
  4. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 943, Cowles Foundation for Research in Economics, Yale University.
  5. repec:ime:imemes:v:19:y:2001:i:s1:p:239-70 is not listed on IDEAS
  6. Saito, Makoto & Shiratsuka, Shigenori, 2001. "Financial Crises As the Failure of Arbitrage: Implications for Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 239-270, February.
  7. Quintos, Carmela E., 1998. "Stability tests in error correction models," Journal of Econometrics, Elsevier, Elsevier, vol. 82(2), pages 289-315, February.
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Cited by:
  1. Takatoshi Ito, 2004. "Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?," RBA Annual Conference Volume, Reserve Bank of Australia, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
  2. Takatoshi Ito & Frederic S. Mishkin, 2004. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Working Papers 10878, National Bureau of Economic Research, Inc.
  3. Takeo Hoshi & Anil K Kashyap, 2008. "Will the U.S. Bank Recapitalization Succeed? Eight Lessons from Japan," NBER Working Papers 14401, National Bureau of Economic Research, Inc.
  4. Harada, Kimie & Ito, Takatoshi & Takahashi, Shuhei, 2013. "Is the Distance to Default a good measure in predicting bank failures? A case study of Japanese major banks," Japan and the World Economy, Elsevier, Elsevier, vol. 27(C), pages 70-82.
  5. Kimie Harada & Takatoshi Ito, 2008. "Did Mergers Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks," NBER Working Papers 14518, National Bureau of Economic Research, Inc.
  6. Takatoshi Ito & Kimie Harada, 2003. "Market Evaluations of Banking Fragility in Japan: Japan Premium, Stock Prices, and Credit Derivatives," NBER Working Papers 9589, National Bureau of Economic Research, Inc.
  7. Takatoshi Ito & Kimie Harada, 2004. "Bank Fragility in Japan, 1995-2003," CESifo Working Paper Series 1137, CESifo Group Munich.
  8. repec:fip:fedfpr:00004 is not listed on IDEAS
  9. Masami Imai, 2006. "Market Discipline and Deposit Insurance Reform in Japan," Wesleyan Economics Working Papers, Wesleyan University, Department of Economics 2006-007, Wesleyan University, Department of Economics.
  10. Woon Gyu Choi & David Cook, 2005. "Stock Market Liquidity and the Macroeconomy," IMF Working Papers 05/6, International Monetary Fund.
  11. Suresh Sundaresan, 2001. "Supervisor and Market Analysts: What Should Research be Seeking?," Journal of Financial Services Research, Springer, Springer, vol. 20(2), pages 275-280, October.
  12. Hideaki Miyajima & Yishay Yafeh, 2003. "Japan's Banking Crisis: Who has the Most to Lose?," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 03010, Research Institute of Economy, Trade and Industry (RIETI).
  13. Arikawa Yasuhiro & Miyajima Hideaki, 2005. "Relationship Banking in post Bubble Japan: Co-existence of soft-and hard budget constraint," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 05015, Research Institute of Economy, Trade and Industry (RIETI).
  14. Imai, Masami, 2006. "Market discipline and deposit insurance reform in Japan," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(12), pages 3433-3452, December.
  15. Wali Ullah & Yasumasa Matsuda, 2014. "Generalized Nelson-Siegel Term Structure Model : Do the second slope and curvature factors improve the in-sample fit and out-of-sample forecast?," TERG Discussion Papers, Graduate School of Economics and Management, Tohoku University 312, Graduate School of Economics and Management, Tohoku University.

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