The predictability of aggregate Japanese stock returns: Implications of dividend yield

This paper explores the implications of a dividend yield model for predicting aggregate Japanese stock returns using long time-series data from 1949 to 2009. In addition to one-period return tests, we conduct statistical tests based on dividend growth forecasts and long-horizon return forecasts implied by one-year regressions to provide significant evidence for the predictability of aggregate Japanese stock returns. Our findings therefore strengthen the international evidence for the role of dividend yield in predicting returns. However, we find that direct long-horizon regressions are not a powerful way of testing the null hypothesis of no return predictability. Moreover, we find that current cash flow is a more important driving force than future cash flow in the stock market fluctuations, although the dominant force is attributed to expected future returns.