The stock market, fundamentals, cash flow, and private investment: evidence from Japan

Using Japanese postwar annual aggregate data, we examine the responsiveness of investment to three variables - asset Q (stock market), fundamentals Q (discounted future "profits"), and cash flow. We find considerable support for cash Row, but only moderate and very weak support for fundamentals Q an d asset Q, respectively. Earlier work that has estimated investment equations on Japanese data spann ing the entire period from the 1960s to the 1990s may therefore be plagued with specification error When estimating the investment equations, we are c areful to split the Japanese post-war period into two samples. (C) 2000 Pub lished by Elsevier Science B.V.