COMMENT: WHAT CAUSED FIXED INVESTMENT TO STAGNATE DURING THE 1990S IN JAPAN? EVIDENCE FROM PANEL DATA OF LISTED COMPANIES

Abstract

The investment-saving balance of the Japanese non-financial corporate sector persistently declined over the 1990s. In 1990, on the eve of the collapse in land prices, investment exceeded savings by 53 trillion, 226 billion yen reflecting lively investment activities, but in 1998 savings exceeded investment by 20 trillion, 248 billion yen. A financial surplus in the corporate sector casts doubt on the importance of the availability of internal funds in a fixed investment decision. This paper is a serious look at this issue and is based on a panel data set of Japanese listed firms and sheds new light on the role of cash flows in investment decision. This paper shows that the role of cash flow, or more broadly liquidity, changed in the course of the 1990s from mitigation of current liquidity constraints to preparation for future liquidity constraints. The paper finds that positive cash flow sensitivity can be seen as evidence of liquidity constraints for the first half of the 1990s, but it is an indicator for poor preparation for future liquidity constraints in the latter half of the 1990s. This hints at the importance of precautionary savings in the corporate sector in this period. Increasing uncertainty caused by the banking crisis in the late 1990s prompted firms to accumulate liquidity assets that served as a buffer against future liquidity shocks. The paper further shows that lack of profitable investment opportunities, represented by low Tobin’s q, can explain the stagnancy of fixed investment in the 1990s. This paper is an important contribution to understanding the mechanism of the stagnancy of Japanese corporate fixed investment in the 1990s. My comments are concerned with three points. One is the usefulness of information on firm attributes when the whole sample is divided into subgroups in estimating investment functions. Another is on the interpretation of estimation results. If the firms are not liquidity constrained in the latter half of 1990s, they are then unconstrained in investment decisions? The last point is on the importance of bank health in the latter half of the 1990s. A fresh interpretation of the results found in the paper by Hori, Saito and Ando (2006) is possible when issues related to bank health are considered.