Can macroeconomic variables explain long-term stock market movements? A comparison of the US and Japan

Within the framework of a standard discounted value model, we examine
whether a number of macroeconomic variables influence stock prices in the
US and Japan. A cointegration analysis is applied in order to model the
long-term relationship between industrial production, the consumer price
index, money supply, long-term interest rates and stock prices in the US
and Japan. For the US, we find the data are consistent with a single
cointegrating vector, where stock prices are positively related to industrial
production and negatively related to both the consumer price index and the
long-term interest rate. We also find an insignificant (although positive)
relationship between the US stock prices and the money supply. However,
for the Japanese data, we find two cointegrating vectors. We find for one
vector that stock prices are influenced positively by industrial production
and negatively by the money supply. For the second cointegrating vector,
we find industrial production to be negatively influenced by the consumer
price index and a long-term interest rate. These contrasting results may be
due to the slump in the Japanese economy during the 1990s and
consequent liquidity trap.