International Review of Business Research Papers Vol. 10. No. 2. September 2014 Issue. Pp. 46 – 61
Financial Development and Economic Growth: The Role of Stock Market in Japan Athambawa Jahfera and Tohru Inoueb This paper examines the long run relationship between the financial development, stock market development and economic growth in Japan. Johansen Co-integration Technique and Vector Error Correction Model are used to investigate the relationships. The results demonstrate that there is a long-run equilibrium relationship between the financial development, stock market development and economic growth in Japan and that financial development and stock market development causes economic growth, but there is no evidence of causality from economic growth to financial development or stock market development. Further analyses show that, although bank based financial development and stock market development leads economic growth, stock market development plays important role during the period 1974-2011 in Japan. Therefore, we conclude that stock market development is matter for the economic growth of Japan after 1974.
Keywords: Financial Development, Stock Market, Economic Growth, Japan JEL: G10; G21; O40
1. Introduction The relationship between financial development and economic growth has been received considerable attention since the work of Schumpeter (1911). Schumpeter emphasized the importance of the banking system in economic growth. The endogenous growth literature stressed that financial development is an important factor for the long run economic growth (Lucas, 1988; Greenwood and Jovanovic, 1990; Bencivenga and Smith, 1991). McKinnon (1973) and Shaw (1973) argued that government repression of financial system through interest rate ceiling and direct credit to preferential non-productive sectors, among other restrictive measures, impedes financial development which they claim is essential for economic growth. Further, King and Levine (1993) show that level of financial intermediation is a good predictor of longrun rates of economic growth, capital accumulation, and productivity improvement. In contrast, Robinson (1952) argues that economic growth creates demand for more financial services and thereby leads to financial development. However, the relationship between financial development and economic growth has been comprehensively studied in both the theoretical and empirical literature1. Besides these arguments, theoretical models also interpreted in conflicting inferences about whether stock markets and banks act as substitutes or complements of each a
Dr. Athambawa Jahfer, Department of Accountancy and Finance, Faculty of Management and Commerce, South Eastern University of Sri Lanka, Oluvil, Sri Lanka. :
[email protected]./
[email protected], Telephone: 0094 77 9354585, Fax:0094 672255069 b Professor. Tohru Inoue, Faculty of Business Administration of Yokohama National University, 79-4 Tokiwadai, Hodogaya-ku, Yokohama city, Japan. Email:
[email protected], Telephone/Fax: 0081 45 3393755
Jahfer & Inoue other. Boyd and Prescott (1986) argue that banks play in ease information frictions and therefore improving resource allocation, while Stiglitz (1985) and Bhide (1993) defend the idea that bank are more efficient than equity markets in improving resource allocation and corporate governance. Singh (1997) argued that stock market may not be important in attaining higher economic growth. In contrast, Leveine and Zervos (1998) found that stock market liquidity and market development are strong predictors of the economic growth. According to Levine (2001) well-functioning stock markets are expected to influence growth through increased capital accumulation and by influencing the efficiency of capital allocation. Hence, development of stock market is one of the key factors for the economic growth. Patrick (1966) studied the role of financial development for the economic growth under the „demand following‟ that is, economic growth causes financial development and „supply leading‟ approach where the causality occurs from financial development to economic growth. Aretis et al. (2001) investigated the relationship between stock market development and economic growth by controlling the effect of banking system and stock market volatility for five developed countries (United States, United Kingdom, Japan, Germany, and France) and concluded bank based financial system may able to promote long-term economic growth than capital market based. Bong-Soo Lee (2012) reexamine the relative merits of bank-based and market-based financial systems in promoting long-run economic growth, which has been debated since the 19th century and found that in the U.S., the U.K., and Japan, the stock market played an important role in financing economic growth, whereas the banking sector played a more important role in Germany, France, and Korea. These conflicting views lead further empirical investigation on the relationship between financial development and stock market development and economic growth in developed country like Japan. Why we have to focus on Japan? Because even though Japan is the one of developed countries, economic growth rate has been declined after mid of 1970s and financial reforms are taken place after 1974. Looking back at Japan‟s economic growth from a long-term perspective, Japan experienced rapid economic growth with average growth rates of 10 percent in the 1960s. In the 1970s and 1980s, the rate did not reach double-digit figures but was stable, averaging an annualized 4 to 5 percent. In the second half of the 1980s, rising stock and real estate prices caused the Japanese economy to overheat in what was later to be known as the Japanese asset price bubble caused by the policy of low interest rate by Bank of Japan. The economic bubble came to abrupt end as the Tokyo Stock Exchange crashed in 1990-1992 and real peaked in 1991. Economic growth in Japan throughout the 1990s is around 1.5 percent and falling below 1 percent during the 2000s. Further, Japan has the bank based financial system. The financial system of Japan had undergone substantial changes since the mid of 1970s. Japan‟s financial deregulation began in the late 1970s with reforms in the bond, foreign exchange and stock market. In order to offset fiscal deficits, the Japan government began to issue large scale revenue financing bonds and forced banks to raise the share of bonds in their portfolio after 1975. The increase in supply of government bonds also encouraged the development of money market.2 However, due to the fact that firms could choose more freely among alternative fund sources, many Japanese companies had financed their funding needs
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Jahfer & Inoue in the capital markets rather than through bank lending in the late 1980s. Thus, there existed competition of firms‟ borrowing in financial markets. To survive, banks tried to maintain loan outstanding. This caused banks to look for new borrowers, such as construction companies, real estate developers and non-banking finance companies on which they had not learned enough credit information. This is one of the reasons why Japanese banks have accumulated huge bad loans (see Honda (2003, p.137). When we look at the Stock market of Japan which started to develop in 1967 and from 1974 onwards, the market capitalization continued to sharp increase. 3 Nowadays, it remains the second largest stock exchange in the world by total market capitalization of listed companies. So, though many empirical studies have investigated the relationship between financial market development and economic growth in the world, the role of stock market development in the economic growth of Japan is not well researched after 1974. This study is an attempt to fill this gap. Therefore, we examine whether the measures of financial development and stock market development each caused economic growth or the stock market development and financial development indicators jointly caused the economic growth of Japan specially during the period 1974-2011. The aim of this paper is to contributing to the
existing literature on financial market development and economic growth using latest data by linking the stock market development for the economic growth in Japan. We find that although bank based financial development and stock market development leads economic growth, stock market development plays important role during the period 1974-2011 in Japan. There is no evidence of causality from economic growth to financial development or stock market development. This study gives some limelight of the stock market development in the financial development for economic growth in Japan. Thus our results could be valuable for developed countries for making decision in relation to financial market development. The rest of paper is organized as follows: Section 2 summarizes literature review. Section 3 describes the data and methodology. Section 4 presents finds of the study while summary and conclusions are presented in section 5.
2. Literature Review The contribution of the financial markets to growth has received considerable attention with the emergence of the endogenous growth theory. According to Edison et al. (2002), more developed financial system is better able to effectively absorb capital inflows, especially if these flows are fungible. Thus, financial development might help explain possible divergent outcomes across countries with different incomes. Cross-country studies such as Roubini and Sala-l-Martin (1992), Easterly and Rebelo (1993), De Gregorio and Guidotti (1995), Khan and Senhadji (2003) and Andersen and Tarp (2003) lend credence to financial development having a positive effect on long-run economic growth. Further, Levine and Zervos (1998); Beck et. al. (2000); Rajan and Zingales (2001) gave empirical evidence supporting the hypothesis that financial development enhances economic growth. There are conflicting arguments in the role of stock market and bank development in the economic growth. Goldsmith (1969), Mckinnon (1973) and Shaw (1973) initially
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Jahfer & Inoue hypothesize that financial liberalization and stock market development would promote economic growth through their impacts on the growth rate of savings, investment, and thus economic growth. This is also called Mckinnon-Shaw model. Burkett (1987); Buffie (1984); Taylor (1980) argue that the stock market development may not lead to increased growth rates of output. Espinnosa and Hunter (1994) assert that a fully liberalized financial sector may not be possible or desirable in a developing economy because the stock market fluctuation would incite greater increases in financial suppression than GDP growth. Stiglitz (1985) shows that bank perform better than stock market in promoting economic growth. Singh (1997) indicates that stock market do not lead to long-run economic growth due to macroeconomic instability, volatility and arbitrariness of pricing process, while Japillo and Pagano (1994) argue stock market contribute positively for the economic growth. However, Boyd and smith (1998) and Blackburn et al (2005) have shown that both stock market and banks are necessary in promoting economic growth. Further, Gregorio and Guidotti (1995) have found a strong positive correlation between stock market development and economic growth. Further, Harris (1997) investigated on 49 countries over the period 1980-1991 and found no significant relationship between stock market and economic growth. He utilizes two stages least squares technique whereby the sample size is divided into two sectors: developed and less developed countries. Accordingly, stock market has some explanatory power in developed countries whereas in developing countries, stock market and economic growth do not appear to be robustly correlated. Therefore, it is clear from the previous studies that there are conflict views concerning the role financial development and capital market development can play in economic growth. Therefore, it is clear from the previous studies that there are conflict views concerning the role financial development and capital market development can play in economic growth and the role of stock market development in the economic growth of Japan is not well researched after 1974. Hence, there is a need to investigate the relationship further.
3. Data and Methodology 3.1 Data Source In this study, we use quarterly data for the Japan economy for the period 1957 to 2011. Data were collected mainly from International Financial Statistics (IFS-2012) published by the International Monetary Fund and the reports of Tokyo Stock Exchange and NEEDS data base. Various measures have been used in the literature to proxy for the financial development and the measure that are common in most of studies the ratio of money supply (M2) to the nominal GDP and credit to private sector divided by the nominal GDP. We employ six measures as indicators of financial development and stock market development in order to investigate the causes of financial development including stock market development on economic growth and, further, to examine the sensitivity of the results 4 . Indicators of financial development (FD) are measured as follows. First one is the M2GDPN, represents ratio of money supply (M2) to nominal GDP. M2GDPN has been used as a standard measure of financial development in numerous studies (for example: Calderon & Liu,2003; King and Levine, 1993). A higher M2GDPN ratio implies a larger financial sector and therefore greater financial intermediary development. Second measure we use domestic claims to nominal GDP
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Jahfer & Inoue (DCGDPN). King and Levine (1993) measure financial development by using the ratio of gross claims on the private sector to GDP, which includes credits issued by the monetary authority and government agencies. Third measure is the credit to the private sector to nominal GDP (CPSGDPN). This measure has been used extensively in numerous works (Beck, Levine, & Loayza, 2000; Demetriades & Hussein, 1996; King & Levine, 1993 among others). Calderon and Liu (2003) suggest that this indicator has an advantage as it takes into account the credits to private sector only and isolates the credits channeled to public sector and credits from central bank. Domestic bank loan outstanding to nominal GDP is used as a fourth measure of financial development (BLOSGDPN). Fifth measure is the firms‟ short and long term borrowing from financial institutions divided by value added (SLBFIVA). Sixth measure is the market capitalization to nominal GDP which is the proxy for stock market development (MCAPGDPN). Economic growth is measured by the real gross domestic product per capita (RGDPPC) (Constant 2005). All the data were transferred to natural logarithms for conventional statistical reasons. Figures 1, 2, 3 and 4 show the patterns of key variables on financial development including stock market capitalization used for study over the period 1957 - 2011. Figure 1: Behavior of Key Variables on Financial Development 300 250 200 150
DCGDPN(%)
100
CPSGDPN(%)
50
M2GDPN(%) 1957 Q1 1959 Q3 1962 Q1 1964 Q3 1967 Q1 1969 Q3 1972 Q1 1974 Q3 1977 Q1 1979 Q3 1982 Q1 1984 Q3 1987 Q1 1989 Q3 1992 Q1 1994 Q3 1997 Q1 1999 Q3 2002 Q1 2004 Q3 2007 Q1 2009 Q3
0
Figure 2: Trend of Domestic Bank Loan Outstanding to Nominal GDP 1200
DBLOSGDPN(%)
1000 800 600 DBLOSGD PN(%)
400 0
1970… 1971… 1973… 1975… 1977… 1978… 1980… 1982… 1984… 1985… 1987… 1989… 1991… 1992… 1994… 1996… 1998… 1999… 2001… 2003… 2005… 2006… 2008… 2010…
200
50
Jahfer & Inoue Figure 3: Trend of Firms’ Short and Long-term Borrowing from Financial Institutions Divided by Value Added
SLBFIVA(%) 1000 800 600 400 SLBFIVA(%)
200 1957 Q1 1959 Q3 1962 Q1 1964 Q3 1967 Q1 1969 Q3 1972 Q1 1974 Q3 1977 Q1 1979 Q3 1982 Q1 1984 Q3 1987 Q1 1989 Q3 1992 Q1 1994 Q3 1997 Q1 1999 Q3 2002 Q1 2004 Q3 2007 Q1 2009 Q3
0
Figure 4: Trend of Market Capitalization to Nominal GDP
3.2 Empirical Model Specification In order to investigate the relationship between financial development (FD), Stock Market development (SMD) and economic growth (GDP), Co-integration test and Vector Error Correction Model (VECM) are applied. Since macroeconomic time series data contain unit root, variables used in the study are tested for stationary before running causality tests. For this purpose, unit roots are tested using Augmented Dickey-Fuller (1979) test. After confirming that the variables are integrated of order one, then it is tested the existence of co-integration relationship between the variables. The cointegration tests were done among the variables using the Johansen (1998) cointegration tests. Since Johansen co-integration is sensitive to the lag length, we used Schwarz Information Criterion in the VAR to determine the appropriate number of lag. If co-integration detected between variables, then it is known that there exists a long term equilibrium relationship between them. So, we can estimate VECM with variables. Accordingly, we estimate the following three VECMs for investigating the cause of financial development and stock market development to economic growth.
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Jahfer & Inoue a. VECM between Financial development and economic growth. n
n
i 1
i 1
GDPt 10 11i GDPt i 12i FDt i 13 ECTt 1 t n
n
i 1
i 1
(1)
FDt 20 21i FDt i 22i GDPt i 23 ECTt 1 t
b. VECM between Stock market development and economic growth. n
n
i 1
i 1
n
n
i 1
i 1
GDPt 10 11i GDPt i 12i SMDt i 13 ECTt 1 t
(2)
SMDt 30 21i SMDt i 22i GDPt i 23 ECTt 1 t
c. Trivariate VECM between financial development, stock market development and economic growth. n
n
n
i 1
i 1
i 1
GDPt 10 11i GDPt i 12i FDt i 13i SMDt i 14 ECTt 1 t n
n
(3)
n
FDt 20 21i FDt i 22i SMDt i 23i GDPt i 24 ECTt 1 t i 1
i 1
i 1
n
n
n
i 1
i 1
i 1
SMDt 30 31i SMDt i 32i GDPt i 313i FDt i 34 ECTt 1 t
Where ECTt 1 is the lagged value of the error correction term, t is white noise error terms, △ is the first-difference of the variable, GDP is the real GDP per capita, FD represents one of the bank based financial development, which is this study comprises money supply (M2), domestic outstanding bank loan (BLOS), domestic claims (DC), claims for private sector (CPS) and firms‟ short and long term borrowing from financial institutions (SLBFI). SMD is the stock market development,
4. Findings 4.1 Unit Root Test Augmented Dickey-Fuller (ADF) test was employed to check the stationarity of the variables. The tests were conducted with intercept only and intercept and trend respectively on the level and first differences of the variables. The results of ADF test are given in Table 1. Real GDP per capita is stationary in both its level and first difference at 5% and 1% significant level respectively. Other variables are significant at 1% level on first differencing. Thus variables are stationary and integrated of same order I (1).
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Jahfer & Inoue Table 1: Augmented Dickey-Fuller (ADF) Unit Root Test Results Variables Level First Difference Test with Test with Trend Test with Test with Trend Intercept and Intercept Intercept and Intercept RGDPPC -3.187** -1.159 -4.715*** -5.654*** (4) (4) (3) (3) M2/GDPN 1.052 -1.898 -11.418*** -11.408*** (0) (0) (0) (0) DC/GDPN -1.839 -1.760 -13.092*** -13.343*** (0) (0) (0) (0) CPS/GDPN -1.427 -0.3111 -10.855*** -11.088 (0) (0) (0) (0) BLOS/GDPN -1.889 -1.945 -11.720*** -11.676*** (0) (0) (0) (0) SLBFI/VA -1.143 -2.082 -4.465*** -4.454*** (8) (8) (7) (7) MCAP/GDP -1.699 -1.338 -11.409*** -11.455*** N (0) (0) (0) (0) Notes: ***, ** , * indicates significance at the 1%, 5% and 10% level respectively. Critical values with intercept and with trend and intercept are for all tests are -3.475, -2.881, -2.577 and -4.022, -3.441, -3.144 at the 1%, 5% and 10% levels of significance in that order. The numbers within bracket indicates number of lags which were selected based Schwarz information criterion.
4.2 Co-integration Tests Having confirmed that all variable are integrated of order (1), the co-integration tests were done among the variables using the Johansen‟s co-integration tests to investigate the long-term equilibrium relationship among the variables. Number of lags is selected using an optimal lag structure in the unrestricted VAR. Johansen‟s approach derives two likelihood estimators for the co-integration rank: a trace test and a maximum Eigen value test. Table 2 presents summarized co-integration results between the variables. All measures of financial development are not co-integrated with GDP. Only domestic claims (DCGDPN) and bank loan outstanding (BLOSGDPN) are co-integrated with GDP. The indicator of stock market development (MCAPGDPN) is also co-integrated with GDP. But, when we check the co integration between financial development indicators, stock market capitalization and GDP, all measures are co-integrated which indicate the existence of long-run association between financial development indicators, stock market development and economic growth. So, it is clear that stock market development play important role for the long term equilibrium relationship between financial development and economic growth during the period 1974-2011.5
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Jahfer & Inoue Table 2: Johansen Co-integration Test Results Hypothesized Trace Test Maximum Eigenvalue Test No. of CE(s) Test Critical Prob.** Test Critical Prob.** Statistic Value5% Statistic Value5% i. RGDPPC, MCAPGDPN None * 20.5364 15.4947 0.008 16.4333 14.2646 0.022 At most 1 * 4.10306 3.84146 0.042 4.10306 3.84146 0.042 ii. RGDPPC, M2GDPN None 12.0356 15.4947 0.155 11.8781 14.2646 0.115 At most 1 0.15741 3.84146 0.691 0.15741 3.84146 0.691 iii. RGDPPC, DCGDPN None * 21.3131 15.4947 0.005 15.1144 14.2646 0.036 At most 1 * 6.19871 3.84146 0.012 6.19871 3.84146 0.012 iv. RGDPPC, CPS None 12.2549 15.4947 0.145 9.93642 14.2646 0.216 At most 1 2.31855 3.84146 0.127 2.31855 3.84146 0.127 v. RGDPPC, BLOSGDPN None * 16.5819 15.4947 0.034 12.1537 14.2646 0.105 At most 1 * 4.42821 3.84146 0.035 4.42821 3.84146 0.035 vi. RGDPPC, SLBFIVA None 11.1219 15.4947 0.204 9.92552 14.2646 0.216 At most 1 1.19637 3.84146 0.274 1.19637 3.84146 0.274 vii. RGDPPC, M2GDPN, MCAPGDPN None 29.2585 29.7970 0.057 23.6771 21.1316 0.021 At most 1 5.58139 15.4947 0.744 5.40374 14.2646 0.690 At most 2 0.17765 3.84146 0.673 0.17765 3.84146 0.673 x. RGDPPC, DC, MCAPGDPN None * 38.9670 29.7970 0.003 27.9227 21.1316 0.004 At most 1 11.0442 15.4947 0.208 8.26302 14.2646 0.352 At most 2 2.78121 3.84146 0.095 2.78121 3.84146 0.095 xi. RGDPPC, CPS, MCAPGDPN None * 31.4160 29.7970 0.032 22.2614 21.1316 0.034 At most 1 9.15463 15.4947 0.351 6.19576 14.2646 0.588 At most 2 2.95887 3.84146 0.085 2.95887 3.84146 0.085 viii. RGDPPC, BLOSGDPN, MCAPGDPN None * 34.7101 29.7970 0.012 24.3345 21.1316 0.017 At most 1 10.3756 15.4947 0.252 6.28886 14.2646 0.576 At most 2* 4.08677 3.84146 0.043 4.08677 3.84146 0.043 vii. RGDPPC, SLBFIVA, MCAPGDPN None * 35.0203 29.7970 0.011 26.7614 21.1316 0.007 At most 1 8.25895 15.4947 0.438 6.79976 14.2646 0.513 At most 2 1.45918 3.84146 0.227 1.45918 3.841466 0.2271 * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values; Observations: 146.
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Jahfer & Inoue 4.3 Vector Error Correction Model (VECM) Since the variables are co-integrated, there are long term relationships among the variables under consideration. Table 3 presents summary results of VECM estimates with respect to GDP, indicators of financial development and stock market development under the three models for the period 1974-2011. The estimated error correction terms (ECT) are negative and highly significant in all models regardless of the indicator of financial development when the GDP is dependent. These results are supporting the co-integration among the variables represented by models.6 According to Table 3 in Model 1, coefficients of DCGDPN and BLOSGDPN are not significant, but in Model 2, the coefficient of MCAPGDPN is negative and significant at 1 percent level. This magnitude implies that stock market capitalization will increase GDP in the long run, but there is no significant evidence that financial development will increase the GDP even though ECT is significantly negative. Model 3, which is the trivariate VECM between financial development, stock market development and economic growth, shows MCAPGDPN is significant and negative in all estimates. In the case of financial development indicator in Model 3, only the coefficients of M2GDPN and DCGDPN are significantly negative. The coefficients of CPSGDPN, BLOSGDPN, and SLBFIVA are not significant. So, when we test the co-integration between the measures of financial development and economic growth only two measures are cointegrated and the coefficients of these two variables in the VECM are not significant. But it co-integrated when add the market capitalization with financial development. Further estimated trivariate VECM between financial development indicators, stock market development and economic growth show significant results. Hence, the results demonstrate that there is a long-run equilibrium relationship between the financial development, stock market development and economic growth in Japan. Further analyses show that, although bank based financial development and stock market development leads economic growth, stock market development plays important role during the period 1974-2011 in Japan. Table 3 also indicates that financial development and stock market development causes economic growth, at the same time we could not find any significant results on the reverse. So, there are no bi-directional casualties between financial development or stock market development and economic growth. We also estimated the VECM between the financial development, stock market development and economic growth during the period 1957-1973 and, could not find any significant results that financial development or stock market development causes economic growth. However, there are evidence that economic growth causes the M2GDPN and MCAPGDPN. Under trivariate VECM analyses also, we could not find any significant results that stock market development causes economic growth. So, we shall conclude that stock market development is not matter for the economic growth during the period 1957-1974.7
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Jahfer & Inoue Table 3: VECM on Financial Development, Stock Market Development and Economic Growth Model 1: - Bivariate Analysis between Financial Development and GDP Dependent variable
Variables
RGDPPC
RGDPPC(-1) DCGDPN(-1) 1.000 -0.999 (-0.723) -1.001 1.000 (-4.528) RGDPPC(-1) BLOSGDPN 1.000 -4.102 (-0.948) -0.244 1.000 (-3.565)
DCGDPN RGDPPC BLOSGDPN
ECT
R2
Adj R2
-0.017* (-1.908) 0.003 (2.342)
0.79
0.77
0.19
0.12
-0.024*** (-3.410) -0.007 (-1.100)
0.78
0.76
0.09
0.01
Model 2: Bivariate Analysis between Market Capitalization and GDP Dependent variable
Variables
ECT
R2
Adj R2
RGDPPC
RGDPPC(-1) MCAPGDPN(-1) 1.000 -1.864*** (-5.207)
-0.047*** (-3.995)
0.78
0.77
0.003 (0.115)
0.04
-0.4
MCAPGDPN
-0.536 (-7.335)
1.000
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Jahfer & Inoue Model 3: Trivariate Analysis between Financial Development, Market Capitalization and GDP Dependent Variables ECT R2 Adj R2 variable RGDPPC
RGDPPC(-1) M2GDPN(-1) MCAPGDPN(-1)
1.000 M2GDPN MCAPGDPN RGDPPC
-0.485 (-7.177) -0.719 (-5.827)
MCAPGDPN RGDPPC
-0.299 (-11.097) -1.172 (-3.852)
MCAPGDPN
-0.083*** (-4.631) -0.006 (-1.308) -0.016 (-0.549)
0.83
0.81
0.13
0.03
0.10
-0.04
-3.346*** (-6.661) 1.000 3.921 (2.049)
-0.853*** (-4.372) 0.255 (3.873) 1.000
-0.115*** (-4.489) 0.011 (0.772) -0.010 (-0.392)
0.81
0.79
0.19
0.11
0.08
-0.01
-0.048*** (-3.764) -0.003 (-1.246) -0.035 (-0.986)
0.80
0.78
0.13
0.03
0.08
-0.4
-0.065*** (-4.068) -0.004 (-0.767) -0.030 (-0.818)
0.80
0.78
0.40
0.33
0.12
0.01
-0.055*** (-4.769) 0.000 (0.737) -0.005 (-0.192)
0.81
0.79
0.11
0.03
0.05
-0.04
RGDPPC(-1)CPSGDPN(-1) MCAPGDPN(-1)
1.000 CPSGDPN
1.483 (2.039)
-1.391*** (-5.424) 0.674 (3.923) 1.000
RGDPPC(-1) DCGDPN(-1) MCAPGDPN(-1)
1.000 DCGDPN
-2.062 *** (-3.474) 1.000
1.115 (4.211) -0.410 (-598)
0.897 ( 0.681) 1.000 -0.368 (-0.598)
-2.438*** -5.190) -2.719 (-3.989) 1.000
RGDPPC(-1) SLBFIVA(-1) MCAPGDPN(-1)
RGDPPC
1.000
SLBFIVA
1.825 (5.682) -0.474 (-8.944)
MCAPGDPN
0.54788 (1.209) 1.000 -0.259 (-1.028)
-2.109*** (-8.697) -3.845 (-4.699) 1.000
RGDPPC(-1) BLOSGDPN(-1 MCAPGDP(-1)
RGDPPC
1.000
BLOSGDPN
194.80 (4.774) -0.502 (-9.061)
MCAPGDPN
0.005 (0.003) 1.000 -0.003 (-0.003)
-1.994*** (-6.540) -388.35 (-3.573) 1.000
Note: **, *** indicate significance at 1% and 5% levels respectively. The t-values are in parenthesis. Included observations: 146 after adjustments DCGDPN - domestic claims to nominal GDP, CPSGDPN – claims on private sector to nominal GDP, BLOSGDPN- domestic bank loan outstanding to nominal GDP, SLBFIVA - firms short and long term borrowing from financial institutions divided by Value Added. MCAPGDPN - market capitalization to nominal GDP
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Jahfer & Inoue 6. Summary and Conclusion This study investigates the relationships between the financial development, stock market development and economic growth in Japan. Though we use quarterly data over the period 1957 to 2011, our focus period is 1974-2011. The stationary of the data are tested using Augmented Dickey Fuller (ADF) test. Johansen co-integration technique and the Vector Error Correction Model (VECM) are used to estimate the causes of financial development, and stock market development on economic growth. Five different measures of financial development (M2/GDP, DC/GDP, CPS/GDP, BLOS/GDP and SLBFIVA) and market capitalization (MCAPGDPN) as measure of stock market development are used in this study. Economic growth is measured by the real gross domestic product per capita (RGDPPC). Johansen co-integration test finds that only two financial development indicators (DCGDPN and M2GDPN) are co integrated with GDP, but when we test the cointegration between financial development indicators incorporating market capitalization and GDP, all measures are co-integrated. The results demonstrate that there is a longrun equilibrium relationship between financial development, stock market development and economic growth in Japan and that financial development and stock market development causes economic growth, but there is no evidence of causality from economic growth to financial development or stock market development. Further analyses show that, although bank based financial development and stock market development leads economic growth, stock market development plays important role during the period 1974-2011 in Japan. We also found that stock market development is not matter for the economic growth during the period 1957-1974. But there is evidence that economic growth caused the financial development including the stock market development during this period. Hence, major implication of our findings is that stock market development is matter for the economic growth of Japan after 1974. However, this study also finds some positive results from the bivariate analysis bidirectional causality. So, in order to get a clear picture of the direction of causality, further comprehensive studies need to be carried out using alternative economic growth measures and stock market and bank based financial development indicators.
Acknowledgements The authors acknowledge financial support from the Japan Foundation under Japan Foundation Japanese Studies Fellowship 2012. The authors are also thankful to anonymous referees and the editor of this journal for their constructive comments.
Endnotes 1
For example, Beck et al. 2000; Levine and Zervos 1996, 1998; Levine 1997; Levine et al. 2000; Rajan and Zingales 1998; Demetriades and Hussein 1996; Luintel and Khan 1999. 2 See Hoshi and Kashyap, 1999 3 The Tokyo Stock Exchange was established on May 15, 1878. In 1943, the exchange was combined with ten other stock exchanges in major Japanese cities to form a single Japanese Stock Exchange. 4 It is notable that the majority of the previous studies use a single measure of financial development.
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We also checked the co-integration between the financial development for the period 1957-1973 and found except DCGDPN, other financial development indicators are co-integrated with GDP. In the case of trivariate analysis between financial development, stock market development and economic growth, except DCGDPN, other financial development indicators and stock market development indicator are co-integrated with GDP ( due to space, results are not presented). 6 Due to space, detailed results are not presented here. Upon request, it will be provided. 7 The results are not presented here.
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