Unique Symptoms of Japanese Stagnation: An Equity Market Perspective

This paper documents several unique financial symptoms of Japanese economic stagnation in the 1990s. We find a surprising fall in firm‐level volatility and turnover in Japanese stocks after the market crash in 1990. These results stand in sharp contrast to the U.S. case, where firm‐level volatility generally increases after a market crash. Further analysis reveals a parallel sharp reduction in earnings heterogeneity among Japanese firms. Preliminary evidence suggests that the reduction in firm‐level volatility may be related to Japanese business group protection. The large decrease in firm‐level volatility may impede the equity market's information role, as it has made it more difficult over the past decade for both investors and managers to distinguish high quality from low‐quality firms.