THE JAPANESE AND US STOCK-PRICES - A COMPARATIVE FUNDAMENTAL ANALYSIS

The Japanese stock market is noted for its high valuation level compar ed to other advanced stock markets. Previous work attributes this valu ation disparity to institutional factors. This paper examines the fund amental determinants of the relative valuation of Japanese and US stoc ks within a simple comparative valuation model. It estimates the impac t of fundamental economic variables on relative stock price indices. A mong the notable findings is the role of exchange rates, retained earn ings, and the effect of regulatory changes as determinants of relative stock valuation between the two countries. The cost of capital is see n to exert only a minor influence.