Corporate investment in Japan: How important are the financial factors?

This paper tries to answer the question: how important are the financial factors in two declines of corporate investment in the 1990's in Japan? We find (1) in 1992-1994 the financial factor, specifically an increase in call rate during 1989-91, partly contributed to the decline of investment especially indirectly through the real factor, but it was not a dominant factor; and (2) in 1998-1999 credit crunch which is induced by the so-called banking crisis played a significant role in the decline of investment directly and indirectly. Eliminating this shock leads the corporate investment to positive growth from negative 7-8% growth, and (3) incorporating interaction between financial factors and real factors (financial accelerator effect) greatly increases the estimate of financial factor effect. In other words, considering only direct effect may lead to a significant underestimate of financial factor effect