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The Stimulus to Consumption of a Rise in Share Prices

May 16, 2006


This report examines the scale of the effect of a rise in share prices on consumer spending and the mechanisms by which the effect is exerted.

A survey of the relationship between share prices and consumer spending reveals that there is a correlation between the two and that, in recent years, the stimulatory effect on consumption of a rise in share prices has grown stronger. Assuming that the correlation recorded over the five years to 2005 has continued, the boost to consumer spending provided by the rise in share prices computes at 0.7% for 2005 and 0.7% (annualized) for the first quarter of 2006.

A rise in share prices could affect consumer spending by the following mechanisms:
(i) Consumers dispose of shares they hold that have risen in price and channel the capital gain into consumption.
(ii) Consumers do not dispose of shares but increase their consumption expenditure on the strength of the latent profit.
(iii) Whether they hold shares or not, expectations that the effects of (i) and (ii) will boost the economy, among other factors, enhance the confidence of consumers and promote consumption.

As regards the scale of (i), a survey of the amount of funds that the household sector withdraws from the stockmarket (including investment trusts) reveals that, across the sector as a whole, the amount has been virtually zero or actually negative for several years. Indeed, it appears that the stockmarket actually absorbed some ¥ 6.2 trillion from the household sector during 2005.

The boost to consumption is chiefly provided by the latent profit effect (ii) and greater consumer confidence (iii). A survey of the asset effect by consumer income band reveals that, in general, although the asset effect tends to be greater among consumers in the higher income bands, who tend to hold more shares, the relationship is by no means stable, suggesting that the effect of (iii) is not insignificant.

A survey of the scale of the asset effect by consumption category reveals that the greatest reaction to a rise in share prices tends to be in consumption of "clothing & footwear", followed in order by "furniture & housewares", "entertainment", and "travel expenses". This suggests that the strongest correlation between share prices and consumption is in non-essential, non-urgent areas of consumption where consumption is most easily driven by consumer confidence, and where consumers feel they can "treat themselves a little".

Inquiries relating to the content of this report, etc. should be addressed to Naoko Ogata , Economics Department, the Japan Research Institute, Limited.

Tel: 03-3288-5120

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