Abstract
It is well known that sluggish private investment plagued the Japanese macroeconomy during the Lost Decade. Previous empirical papers have not reached a clear consensus on what caused the investment slowdown. This paper sheds new light on this issue by fitting a mixed frequency vector autoregressive model to monthly stock prices, quarterly bank loans, firm profit, and private investment. Monthly stock prices explain as much as 50.7% of the long-run forecast error variance of investment. We also reveal a spiral of declining stock prices, profit, and investment. Finally, the stagnation of bank loans is a consequence of declined stock prices, and the former is not a cause of declined investment.
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