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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.

Suggested Citation

  • Takatoshi Ito & Kimie Harada, 2000. "Japan Premium and Stock Prices: Two Mirrors of Japanese Banking Crises," NBER Working Papers 7997, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7997
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    Cited by:

    1. Hideaki Miyajima & Yishay Yafeh, 2003. "Japan's Banking Crisis: Who has the Most to Lose?," Discussion papers 03010, Research Institute of Economy, Trade and Industry (RIETI).
    2. Hoshi, Takeo & Kashyap, Anil K, 2010. "Will the U.S. bank recapitalization succeed? Eight lessons from Japan," Journal of Financial Economics, Elsevier, vol. 97(3), pages 398-417, September.
    3. Imai, Masami, 2006. "Market discipline and deposit insurance reform in Japan," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3433-3452, December.
    4. Woon Gyu Choi & David Cook, 2006. "Stock Market Liquidity and the Macroeconomy: Evidence from Japan," NBER Chapters,in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 309-340 National Bureau of Economic Research, Inc.
    5. Takatoshi Ito & Frederic S. Mishkin, 2006. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Chapters,in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 131-202 National Bureau of Economic Research, Inc.
    6. Takatoshi Ito, 2004. "Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?," RBA Annual Conference Volume,in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
    7. 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 312, Graduate School of Economics and Management, Tohoku University.
    8. Takatoshi Ito & Kimie Harada, 2004. "Bank Fragility in Japan, 1995-2003," CESifo Working Paper Series 1137, CESifo Group Munich.
    9. repec:fip:fedfpr:00004 is not listed on IDEAS
    10. 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.
    11. Harada, Kimie & Ito, Takatoshi, 2011. "Did mergers help Japanese mega-banks avoid failure? Analysis of the distance to default of banks," Journal of the Japanese and International Economies, Elsevier, vol. 25(1), pages 1-22, March.
    12. 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, vol. 27(C), pages 70-82.
    13. Montgomery, Heather & Takahashi, Yuki, 2014. "The economic consequences of the TARP: The effectiveness of bank recapitalization policies in the U.S," Japan and the World Economy, Elsevier, vol. 32(C), pages 49-64.
    14. Akhand Akhtar Hossain, 2015. "The Evolution of Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 14611.
    15. Suresh Sundaresan, 2001. "Supervisor and Market Analysts: What Should Research be Seeking?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 275-280, October.
    16. Arikawa Yasuhiro & Miyajima Hideaki, 2005. "Relationship Banking in post Bubble Japan: Co-existence of soft-and hard budget constraint," Discussion papers 05015, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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