Were Japanese Stock Prices Too High?

44 Pages Posted: 27 Apr 2000 Last revised: 30 Jun 2010

See all articles by Kenneth R. French

Kenneth R. French

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: March 1990

Abstract

The difference between reported price-earnings ratios in the United States and Japan is not as puzzling as it appears at first glance. Nearly half the disparity is caused by differences in accounting practices with respect to consolidation of earnings from subsidiaries and depreciation of fixed assets. If Japanese firms used U.S. accounting rules, we estimate that the P/E ratio for the Tokyo Stock Exchange would have been 32.1, not the reported 54.3, at the end of 1988. Accounting differences are unable, however, to explain the sharp rise in the Japanese stock market during the mid-1980s. Changes in required returns on equities, or in investor expectations of future growth for Japanese firms, must be invoked to explain this phenomenon. Real interest rates declined during the period of rapid price increase, but there is little evidence that growth expectations became more optimistic. The real interest rate changes do not, however, appear large enough to fully account for the change in stock prices.

Suggested Citation

French, Kenneth R. and Poterba, James M., Were Japanese Stock Prices Too High? (March 1990). NBER Working Paper No. w3290. Available at SSRN: https://ssrn.com/abstract=226720

Kenneth R. French (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James M. Poterba

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-350
Cambridge, MA 02142
United States
617-253-6673 (Phone)
617-253-1330 (Fax)

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