The consumptionwealth ratio, real estate wealth, and the Japanese stock market

The first contribution of this paper, in following the works of Lettau and Ludvigson, 2001a and Lettau and Ludvigson, 2001b, is to construct a Japanese consumptionwealth ratio data series and to examine whether it explains Japanese stock market data. We find that the consumptionwealth ratio does predict future stock returns, but the evidence is weaker than that from US data, and the source of predictability is limited to observations after the collapse of the asset bubble at the beginning of the 1990s. The consumptionwealth ratio also helps to explain cross-sectional Japanese stock returns. The second contribution of the paper is that we propose new consumptionwealth ratio that more explicitly deal with household real estate wealth utilizing Japanese aggregate-level data. Such real estate augmented consumptionwealth ratio perform better than the consumptionwealth ratio calculated with only financial wealth data. While the scaled factor model proposed by Lettau and Ludvigson performs relatively well with Japanese data, the book-to-market related anomaly pointed out by Chan et al. (1991) and Jagannathan et al. (1998) remains strong. All rights reserved, Elsevier