Why Does Capital Investment by Japanese Firms Remain Sluggish? A Reexamination from Secular Stagnation Perspective

In the Japanese economyʼs lost decade, the presence of“zombie firms”has been regarded as the main culprit of prolonged stagnation in the sense that it has discouraged the smooth reallocation of productive resources among industries. However, even though most of the zombie firms eventually recovered through downsizing in the first half of the 2000s, the deflationary economy has persisted. Interestingly, even reputable firms, which can be a leading force of innovation, have on the whole remained inactive in terms of investment in growth opportunities. We investigate why capital investment by reputable Japanese firms remains sluggish even though they generally retain sufficient cash reserves or debt capacity to actively invest. Moreover, we hypothesize that such conservative financial and investment policies are driven by three motivations: managerial entrenchment, precautionary saving, and inefficient internal capital market. Our GMM estimation of the q-type investment equation incorporating variables related to these three motivations and considering the possibility of structural changes in firm behavior before and after the global financial crisis suggests the following: before the crisis ( 2004-8 ), a pseudofinancial constraint phenomenon, by which we mean the prioritization of zeroleveraged status over capital investment, prevailed because of managerial entrenchment and precautionary saving. After the crisis ( 2009-13 ), the pseudo-financial constraint phenomenon generally weakened; however, the experience of sudden downturn and temporary liquidity shortage caused by the crisis reinforced the motivation for precautionary saving and reduced capital investment by manufacturing industries. JEL Codes：D22, G31, G32, G34 Keywords：Zero-leverage, Managerial entrenchment, Precautionary saving