Macroeconomic factors and Japan's industry risk

We propose a simple risk indicator based on the cross-sectional distribution of cash flows in a given industry. The indicator is applied to a sample of Japanese industry sectors over the period 1970–2005. The results indicate a slightly lower risk level in domestic-oriented industries relative to industries dependent on export markets. Consistent with evidence based on stock returns and corporate bond yields, we find that risk in domestic-oriented industries is more sensitive to GDP growth, while risk in export-oriented industries is more sensitive to an appreciation in the Japanese currency. There is also evidence that interest rate spreads have a more significant effect on the riskiness of capital-intensive industries.