Economic Analysis Series No.136
Asset Markets and Business Fluctuations in Japan

October, 1994
  • Kazuo Ogawa
  • Shin-ichi Kitasaka
  • Toshio Watanabe
  • Tatsuya Maruyama
  • Hiroshi Yamaoka
  • Yasuharu Iwata


The second longest booms in the post-war period in Japan, which started from November in 1986 and lasted for almost four years and a half, were followed by deep recessions. Characteristics common to these phases of business cycles are volatile fluctuations of asset prices typically observed in the stock and land markets. It has stimulated discussion on the role of the asset markets in the business cycles. What attracts economists are the following question: do the conditions in the asset markets amplify the magnitude of the business fluctuations?

This study is on the same track and examines empirically the relationship of the asset markets with the business cycles. In particular we focus on the demand side of the real economy and analyze how the conditions in the asset markets affect the level of effective demand.

Investment is the most volatile component of the effective demand and many economists have argued that it is the main driving force of the business cycles. The first two papers deal with the relationship of the asset market with business investment. Our aim is twofold.

First of all we examine the role of stock market in the business investment of the corporations. It has been a common understanding among many economists that the stock price summarizes all the relevant information on the future profitability of investment; efficiency hypothesis of the stock market. Recently, however, doubt has been cast upon this hypothesis since the stock price might be contaminated by the volatile noise such as bubble or fads. We examine this hypothesis from the viewpoint of investment. In the investment literature Tobin's average q is a well-known measure of future profitability of investment in the asset market. We scrutinize whether the Tobin's average q at all reflects the future profitability of investment by comparing the average q with the marginal q ; discounted value of expected marginal profitability in the future. If the average q deviates from the marginal q, then it might hint that the stock price contains the bubble or fads components. Furthermore, we examine how the corporate investment responds to the stock price when it does not reflect the profitability of investment.

Secondly, we analyze the relationship of the land market with investment. It has been often asserted in both academic articles and non-academic papers that land asset works as a collateral in borrowing. We examine this assertion quantitatively and analyze the role of land asset in investment decision. In particular we see whether the firm faces borrowing constraints at all and if it does so, it is mitigated by an increase of the market value of land asset held by the firm. This can be done by two approaches. One is by estimating the traditional types of investment functions. The other is a direct estimation and test of the first order condition of investment facing the firm. To sum up, we pay attention to the association of the stock market and the land market with business investment.

Next we re-examine the so-called wealth effect on consumption and residential investment.

The last paper pinpoint the magnitude of wealth effect by pooling the prefectural cross-section data for several years. We classify the assets and consumption expenditure into several categories and then examine which component of wealth is most relevant for changing the level of consumption expenditure and which component of consumption spending is most affected by wealth change.

We hope that this study stimulates the discussions on the channel through which the asset markets affect the real economy and that understanding of the relationship of the asset markets with the real economy is further deepened.

Structure of the whole text(PDF-Format 3file)

  1. page4
    Preface別ウィンドウで開きます。 (PDF-Format 316 KB)
  2. page6
    Summary in Japanese
  3. page14
    Comments at the Workshop in Japanese
  4. Chapter. 1
    1. page16
      Asset Markets and Capital Investment in Japan
    2. page98
      Figure別ウィンドウで開きます。 (PDF-Format 328 KB)
  5. Chapter. 2別ウィンドウで開きます。 (PDF-Format 400 KB)
    1. page113
      Borrowing Constraints and Role of Land Asset in Japanese Corporate Investment Decision
    2. page151
      Data Appendix for an Analysis of Firm's Investment Demand in Japan
  6. Chapter. 3
    1. page171
      An Empirical Re-evoluation of Wealth Effect in Japanese Household Behavior
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