Steel scrap and equity market in Japan

•We test the significance of steel scrap price to determine equity return in Japan.•We are motivated by the view of Dr. Greenspan, a former chair of the FRB.•Dr. Greenspan used scrap price as an indicator for the macroeconomic activities.•The scrap price is informative in explaining the future equity market returns.

Steel scrap is an important raw material in the steel making industry. As steel is a vital metal in modern life, the price of steel scrap is viewed as an important indicator of the macroeconomic activity. Steel scrap is consumed mainly in the electric arc furnace steel making, which represents approximately 30 per cent of the world annual steel production. Unlike other minerals including iron ore, both the supply and consumption amounts of steel scrap can be relatively easily adjusted based on the contemporary industrial activity level. For this reason, the steel scrap price reflects the condition of the macro economy and thereby it can be used as an indicator of future stock market performance in the country by market participants. Nevertheless, there is not much research on the market of steel scrap. This study aims to close this gap by testing the lead–lag relationship between the changes of steel scrap price and the aggregate Japanese stock market movement. Our empirical analyses suggest that the steel scrap price changes are informative in explaining the future stock market performance in Japan.