Living with the "enemy": an analysis of foreign investment in the Japaneseequity market

This paper studies the impact of foreign investment on domestic financial m arkets. In particular, it examines the empirical validity of some protectio nist claims used by regulators to restrict foreign investment. These people argue that: (1) trading by foreign investors tends to increase market vola tility more than trading by domestic investors; (2) foreign investors have more sophisticated investment technology than do their domestic counterpart s, causing domestic investors to "lose out" to foreign ones; and (3) foreig n investors tend to make investment decisions on the basis of short-term ga ins rather than long-term fundamentals, such as corporate dividend growth. We find no evidence supporting these claims from the Japanese experience. T o the contrary, we find that foreign investors tend to be long-term contrar ian players in the market. (C) 2001 Elsevier Science Ltd. All rights reserv ed.