Demographics and Asset Returns in Japan

Theory predicts that changes in demographics affect excess returns. This paper investigates whether this prediction from theory is empirically relevant. We construct demographic indicators from long-term Japanese demographic data and measure the predictive content of these indicators in regressions on equity and bond excess return data. We then assess the quantitative significance of the measured predictability by verifying whether trading on these indicators enhances portfolio returns for risk-averse investors. We find that demographics are important predictors of excess returns