How Macroeconomic Shocks Impact the Japanese Economy: Evidence from the stock market

Many shocks have buffeted the Japanese economy since 2012. This paper investigates how macroeconomic variables affect Japanese sectoral stock prices. The results indicate that changes in global demand and in the yen/dollar exchange rate are paramount. They impact all 86 sectors examined and often produce large swings in the aggregate stock market. By contrast shocks to monetary policy and interest rates only affect about ten of the 86 sectors, and their impact is concentrated on the financial sector. Given the importance of global factors, Japan should redouble efforts to promote freer trade and to help its firms discover new markets when access to U.S. markets is restricted. It should also nurture domestic growth engines.