Preface and acknowledgements
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- 4. Hypothesis
3. Research MotivationThe aforementioned literature motivates the author to conduct further research into this popular topic. The media (i.e. television, magazines and newspapers) mention the crude oil price every day. Crude oil price is a highly sensitive to world circumstances. Therefore, crude oil price shows the interesting and important economic implications it embeds. The early works in crude oil prices focused on macroeconomic implications (see, for example, Hamilton 2003; Cunado and Garcia 2005). In light of this, it would be interesting to explore the influence of crude oil prices on oil importing countries (see, for example, Park and Ratti 2008). Japan is the third largest oil importing country in the world behind the United States and China. In 2010, the Energy Information Administration (EIA) stated that Japan relied on oil imports to meet 45 percent of its energy needs. Japan imports oil, usually either Dubai Crude or Oman Crude, mainly from the Middle East (i.e. Iran, the United Arab Emirates and Oman). Japan maintains government-controlled oil stocks to ensure against a supply interruption. At the end of 2010, the total oil stocks in Japan were 596 million barrels with 54 percent being government stocks and 46 percent belonging to commercial stocks. The limitation of the domestic oil reserve causes Japan to depend heavily on oil from overseas supplies to support its household and industry consumption needs. Therefore Japan plays a crucial role in oil demand, which contributes to the fluctuation of oil prices in the world. The important thing that influences oil price is the balance between supply and demand. As in general, many developed countries influence global demand of oil. For instance, if Japanese economic activities are halted, Japan will reduce its demand of oil and eventually will decrease the oil price in the short run. Moreover, oil as a commodity is highly volatile. It tends to either be in oversupply or shortage supply. When there is a shortage, we expect the price of oil bids up to the highest while when the market is ample, price is expected to arrive at the lowest that producers will accept. However, supply and demand are not alone in driving up the oil price. Tremendous unusual events influence the oil price movements. For example, ever since Oil embargo 1973 and recently, the economic activities of emerging markets such as India and China have grown and continue to demand more and more crude oil, also leading to a higher oil price. As the price has risen, many countries including Japan were demanded less oil. For the purpose of analysis, the author decided to choose automobile manufacturers, because Japanese automobile manufacturers are the most prominent such manufacturers in Asia, and in the world. As an evidence, Japan’s auto manufacturers have grown constantly over a long time and have surpassed the US auto industry by overtaking General Motors of the US as the leading producer of cars in the world by 2008. In the Japanese market, automobile manufacturing is an integrated industry because it relies on many supporting industries to produce the great diversity of materials and components it uses. According to the Japan Automobile Manufacturers Association (JAMA), almost 8 percent of Japan’s working population is involved in auto industry related work. Furthermore, auto production accounts for 17 percent of the total value of Japan’s manufacturing shipments and for approximately 37 percent of the value of the machinery industries’ combined shipments. Therefore, the automotive industry is one of the Japanese economy’s core industrial sectors. The globalization of Japanese auto manufacturing also contributes significantly to local as well as global economies. In light of this, it will be interesting to see whether the macroeconomic aspect given to the oil price creates any impact on the stock performance of auto companies and any impact on the investor. There are fourteen auto companies listed as members in JAMA. These automobile companies produce passenger cars, buses and trucks. This thesis will focus on passenger vehicles, since these vehicles are the most attractive vehicles for consumers with various incomes, indicating that the consumer of this type of car is more likely to be sensitive to the price. Japan’s auto companies have grown in producing passenger cars (e.g. standard cars, small cars and mini cars), which are primarily less expensive if compared to those of its competitors, especially European and US auto companies. This is supported by JAMA statistical data, which shows that within the period from 2007 until 2010 the production of passenger cars reaps 94 percent of the domestic marketshares. There are eight automobile companies who focus on producing passenger cars listed in JAMA. They are Toyota, Honda, Nissan, Suzuki, Mazda, Daihatsu, Mitsubishi, and Fuji Heavy Industries. In 2010, according to JAMA, the trend showed that Toyota, Honda and Nissan are the top three auto companies based on their market shares in Japan. Toyota was the biggest automobile company in Japan with the largest market share amount of 32.78 percent, followed by Honda and Nissan ranked in second and third positions with the market shares of 13.85 percent and 13.81 percent respectively. Table 1: Market shares of the top automobile manufacturers from 2007 to 2010
Source : JAMA In the past few years, Japanese auto companies have made a concerted effort to help counter global warming and to improve air quality. The announcement of the Kyoto Protocol in 1997 recognised that global warming must be addressed and that one way of dealing with the climate change problem is by reducing emissions of carbon. Tanaka et al (2007) stated that Japan is one of the highest producers of CO2 emissions in the world,with the highest source of emissions coming from the industrial and transportation sectors. Tanaka mentioned that, according to the Kyoto Protocol, by 2012 Japan is required to reduce its level of emissions to a point 6 percent below that of 1990. Tanaka also mentioned that the transportation sector, which is the second highest contributor, also exhibited the highest rate of increase from 1990 to 2004. The highest emissions are contributed by the use of passenger cars. Therefore, reducing the CO2 emissions of passenger cars would make a significant contribution toward reducing the overall CO2 emissions in Japan. To reduce CO2 emissions, the automobile manufacturers put much attention into the development of hybrid cars. Japan’s automakers, particulary the top players (Toyota and Honda), are continuously developing and promoting vehicles to reduce the environmental impact. These two top producers claim that the combination of an electric motor and a conventional engine causes cars to need less fuel. Georg (2008) stated that hybrid cars should be produced in order to respond to the environmental problems caused by engine emissions, air pollution, and noise in urban areas. The hybrid vehicles market expanded rapidly as the Japanese automobile manufacturers created massive cumulative sales of hybrid electric vehicles around the world. In the fiscal year 2011, Toyota Motor Company (TMC), which includes the Lexus brand, announced that its global cumulative sales of hybrid cars had surpassed more than 3.03 million units. Similarly, Honda Motor Company, which started to sell its first hybrid car, the Honda Insight, in 1999 and has since developed other hybrid cars, had global cumulative sales of 300,000 units by 2009. Therefore, the automobile manufacturers that are targeting the hybrid market are accelerating their development strategies. Nevertheless, looking at the market by region, the sales figures of both Toyota and Honda on their official websites explicitly say that the largest market shares of hybrid vehicles are not in Japan. The largest market share of hybrid vehicles is in the US, followed by Japan and Europe in second and third rank respectively. It is interesting to analyze the market share of hybrid vehicles in Japan because the market for hybrid cars will continue to grow and will for some time remain at peak level. Moreover, the government proposed to reduce the share of oil consumed in the transportation sector. In light of this, we will analyze whether the peaked sales of hybrid cars influence the relationship between oil price and stock price. Unusual events also influence on oil prices movements. By 2003, the Iraq invasion was confirmed. The war that was motivated by the drive to end Saddam Hussein’s regime impacted on the oil price because Iraq is one of the largest oil producers in the Middle-East. The war caused the oil price to increase above $30 during 2003, according to the NYMEX index. This was the first time that the oil price had risen above $25 since the mid 1980s. Thus, the increase in oil price affected the demand of oil, especially by oil importing countries (i.e. Japan). Moreover, few years after the 2003 Iraq invasion, the credit crisis attacked the world’s economy in 2008. The crisis was triggered by the peak in US housing sales prices during mid 2006. The crisis hit the economic activities not only in the US but also in other developed countries. In light of this, this thesis will also research whether the Iraq invasion 2003 and the financial crisis 2008 had an influence on the relationship between the oil price and the stock price of Japanese automobile manufacturers. In summary, the purpose of this thesis is to provide evidence that will contribute to the effort of explaining the impact of boom in sales of hybrid vehicles on the relationship between oil prices and stock prices. Moreover, the thesis will also contribute toward explaining the oil factor in the Japanese market under Fama French three factor model, specifically, whether the behavior of Japanese auto manufacturers’ stock prices and its relationship with oil factor under some unusual events ( Iraq invasion 2003 and credit crisis 2008) is consistent or not. In regard of this, the thesis will try to answer four research hypotheses that are constructed in the next chapter. 4. HypothesisBased on the Fama-French three factor model, Cameron and Schnusenberg (2008) used the SMB, HML, and market risk premium risk factors, and as an extension they applied a fourth factor model by adding oil price factor. For the first hypothesis, this thesis will apply the same hypothesis as Cameron and Schnusenberg examined. Thus, the paper hypothesizes whether oil prices will have a relationship with the stock return of Japanese auto manufacturers or not. Hypothesis 1: H0 : There is no relationship between oil prices and stock prices of Japanese automobile manufacturers. H1 : There is a relationship between oil prices and Japanese automakers’ stock prices.
H0: The boom in sales of hybrid cars has no influence on the relationship between oil prices and stock prices of Japanese automobile manufacturers. H1: The boom in sales of hybrid cars has an influence on the relationship between oil prices and stock prices of Japanese hybrid cars manufacturers.
H0: The Iraq invasion 2003 had no influence on the relationship between oil prices and stock prices of Japanese automobile manufacturers. H1: The Iraq invasion 2003 had an influence on the relationship between oil prices and the stock prices of Japanese automobile manufacturers.
H0: The credit crisis 2008 had no influence on the relationship between oil prices and stock prices of Japanese automobile manufacturers. H1: The credit crisis 2008 had an influence on the relationship between oil prices and stock prices of automobile manufacturers in Japan.
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