Revisiting profit persistence and the stock market in Japan

•Contrasts the average rate of profit with the incremental rate of profit.•Finds gravitational patterns in the incremental profit rates of 52 Japanese industries.•Use also Panel Data Econometric Techniques.•The movement of profit rates reflects structural changes in the Japanese economy.•The incremental profit rate tracks down the movement of the real rate of returns of Nikkei during the 1974–2008 period.

This paper tests the classical hypothesis of inter-industry profit rate's proclivity to gravitate towards the economy's average profit rate. In so doing, individual as well as panel unit root tests have been applied on a dataset consisting of 52 Japanese manufacturing industries spanning the period 1974–2008. The evidence generated is rather mixed in a sense that the inter-industry profit rates tendency to gravitate towards the economy's average rate of profit depends on the idiosyncratic characteristics of each industry. However, the rate of profit of regulating capitals, as this is reflected in the incremental rate of profit, displays gravitational behaviour around the economy-wide incremental rate of profit, the movement of which is found to be linked to the rate of return in the stock market. These results lend support to those who contend that the classical theory of competition is an area where further research is warranted.