Do Industries Lead Fama-French Factor Returns in Japan?

We investigate whether the returns of industry portfolios in Japan predict Fama and French's well-known small- minus-big (SMB) and high-minus-low (HML) factor returns. In Japan, a significant number of industry returns, such as from glass and ceramics products, iron and steel, machinery, textiles and apparel, and marine transportation, forecast either SMB or HML factor returns by up to two or three months. These results hold even after controlling for many predictable macroeco- nomic variables. These findings suggest that industry returns contain profitable information on Fama-French SMB and HML factor returns, and this provides useful practical information for equity investment businesses.