Causes of the long stagnation of Japan during the 1990s: Financial or real?

Corporate investment is the most important factor to explain the long stagn ation of Japan during the 1990s. Using the Bank of Japan diffusion indices of "real profitability" and "banks' willingness to lend," we estimate inves tment functions for four groups of firms: large/small and manufacturing/non -manufacturing. Our results suggest that for large firms, financing constra ints are not significant whereas the converse is true for small firms. A fa ll of investment during 1992-94 is largely explained by real factors. Howev er, the credit crunch occurred beginning 1997 and it lowered the growth rat e of GDP by 1.6%. (C) 1999 Academic Press. Journal of Economic Literature C lassification Numbers: E22, E30, G21, N15.