## _wp14141

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---

### Introduction
- Since the asset prices collapsed in the early 1990s, the Japanese economy experienced “Lost Decades” of slow growth, deflation, and output persistently below potential (Hayashi and Prescott, 2002).
- Japan’s GDP growth in 2000s, at an average of below 1 percent, was one of the lowest rates among advanced economies.
- Potential growth has steadily declined as a shrinking labor force outweighed contributions from steady productivity gains.
- The Japanese authorities embarked on “Abenomics” and successfully jumpstarted growth to 1½ percent in 2013 on aggressive monetary easing and fiscal stimulus.
- The economy needs to transition from stimulus to private sector-driven recovery given expected contractionary fiscal stance in the medium to long term and headwinds from population aging.
- Private investment previously accounted for about a third of overall growth during the 1980s boom.
- Firms’ balance sheets were impaired after the early 1990s bubble burst; following partial recovery in the mid-2000s, domestic investment was cut back again after the global financial crisis.

### Key questions addressed
- How healthy are corporate balance sheets and have legacy problems been overcome?
- Are Japanese firms sitting on large cash holdings?
- What is holding back corporate investment?

### Main findings
- Financial health of Japanese firms improved over the last two decades: improving profitability, significant deleveraging, and rebuilt liquidity buffers; overseas investment increased.
- Net financial balance turned into surplus since the mid-1990s and continued to improve, but this did not lead to higher investment until recently.
- Empirical analysis finds firms’ expectation of demand growth outlook over the medium term is a key determinant for corporate investment.
- Successful implementation of structural reforms (third arrow of “Abenomics”) is crucial to increase private investment and raise potential growth by improving confidence in the domestic medium-term demand outlook.

### Corporate sector balance sheet developments
- Data sources and approach
  - Closing balance sheet accounts in the national accounts (since 1980).
  - Flow of funds data (Bank of Japan) for decomposition into valuation effects and actual flows.
  - Corporate Financial Statements (Ministry of Finance) for net worth and retained earnings detail.
- Net worth and retained earnings
  - Net worth rebounded sharply in mid-2000s to levels in the late 1980s; underlying trend began improving since mid-1990s after adjusting valuation effects.
  - Retained earnings rose broadly over the last two decades in both manufacturing and nonmanufacturing sectors.
- Interpretation of retained earnings
  - Retained earnings = profits net of dividends/distributions; recorded under shareholders' equity and tend to rise unless net profit is negative or dividends exceed profit.
  - Size of retained earnings alone does not reveal resource allocation — analysis requires both asset and liability sides.
- Key balance sheet developments and magnitudes
  - Deleveraging:
    - Firms paid back about 40 percentage points of GDP in loans between 1991 and 2012.
    - Debt levels (loans and securities other than shares) as of 2012 are much lower than early 1980s.
    - Leverage ratio (total liability over net worth) fell from more than 350 percent in 1989 to about 185 percent in 2012.
  - Liquidity buffers:
    - After 1990s drawdowns to repay debt, firms rebuilt cash and deposit holdings in the early 2000s to levels close to the 1980s average.
    - Cash buffers rose further after the global financial crisis amid increased uncertainty.
  - Overseas expansion:
    - Overseas investment (FDI and securities) increased by more than 15 percent of GDP since mid-1990s.
    - Excluding valuation effects due to exchange rate movement, overseas investment increased by about 25 percent of GDP over this period.
    - Drivers: labor cost differentials and, more recently, host country market size.
  - Domestic capacity and fixed assets:
    - Total stock of nonfinancial assets (excluding land) was very stable between mid-1990s and mid-2000s — firms largely ceased capacity expansion in this period.
    - Firms began to invest again in mid-2000s but stagnated after the global financial crisis.
  - Valuation effects dominate financial asset swings:
    - Large increases in firms' equity holdings in the 1980s (17 to 53 percent of GDP) and early 2000s (28 to 65 percent) and subsequent declines were almost entirely driven by valuation effects.
    - About two-thirds of the large fall in the 1990s (from 53 to 28 percent) was due to valuation effects; about one-third due to actual divestment.
    - Large swings in firms’ land holdings are also attributable to valuation effects on land prices.
- Summary conclusion
  - Firms’ cash and deposit holdings increased over the last two decades, but much less than the increase in retained earnings because profits were allocated to deleveraging, overseas investment, and domestic investment.
  - Net financial balance shifted from a deficit of about 5 to 10 percent of GDP in the 1980s to a surplus from mid-1990s, peaking at about 7¾ percent of GDP in 2003, declining to about 1¼ percent of GDP in 2008, and increasing again to about 5 percent of GDP in recent years.

### Corporate investment: trends, models, and drivers
- Aggregate investment trends and context
  - During the 1980s (growth averaging 4½ percent per year), private investment accounted for more than a third of growth.
  - Total investment fell from more than 30 percent of GDP in early 1990s to about 20 percent of GDP.
  - Nonresidential (corporate) investment fell from around 20 percent of GDP to about 13½ percent of GDP as of 2013 (post-bubble period average ~14 percent).
  - Age of capital stock in manufacturing rose to 17 years (about 3-4 years older compared to the U.S.).
- Modeling approach and data
  - Quarterly data from 1993Q4 to 2013:Q4 used to focus on post-bubble developments; Chow test rejects no structural change around that period.
  - Models estimated: accelerator model, funding-cost model (with financial market data), and augmented Tobin’s Q model with additional variables (cash flow, exchange rates, demand outlook, uncertainty).
- Accelerator model (Table 2)
  - Up to 10 lags of output changes statistically significant in explaining investment; investment responds to desired capital stock dynamics.
  - Table 2 fit statistics:
    - R-squared 0.555
    - Adjusted R-squared 0.461
    - Durbin-Watson stat 0.343
- Model with financial market data (Table 3)
  - Regression relates real investment-to-capital ratio to bank lending spread over sovereign funding cost (Spread), real policy rate, and leverage ratio.
  - Key estimated results (Table 3):
    - Constant 11.204 (Std. Error 0.176; t-Statistic 63.824; Prob. 0.000)
    - Spread (-3) coefficient -0.776 (Std. Error 0.090; t-Statistic -8.583; Prob. 0.000)
    - Real policy rate (-1) coefficient -0.245 (Std. Error 0.048; t-Statistic -5.145; Prob. 0.000)
    - Leverage ratio (-1) coefficient -0.818 (Std. Error 0.111; t-Statistic -7.402; Prob. 0.000)
    - R-squared 0.698; Adjusted R-squared 0.686; Durbin-Watson stat 0.792
  - Interpretation: Funding-cost variables and leverage have expected negative signs and are statistically significant — improving funding conditions have supported corporate investment. Residual serial correlation remains (low Durbin-Watson).
- Augmented Tobin’s Q models (Table 4)
  - Q ratio (market value of equities to net worth) with a three-quarter lag used; Q alone explains about half of corporate investment behavior.
  - Additional variables (demand outlook, cash flow, exchange rate gap, uncertainty) substantially improve fit.
  - Selected Table 4 results:
    - Q ratio (-3) examples: 1.219*** (model 2), 1.014*** (model 3), 0.724*** (model 5)
    - Demand outlook (-1), Cash flow (-1), Exchange rate gap (-4), and Uncertainty (-3) enter with expected signs and statistical significance.
    - R-squared ranges: 0.406 to 0.863 across specifications.
    - Adjusted R-squared up to 0.863; Durbin-Watson stat up to 1.197 in best specification.
  - Economic interpretation of key variables:
    - Profitability: Investment positively associated with future profitability (Q) and medium-term demand outlook (3-year ahead more predictive than 1-year ahead).
    - Liquidity: Positive and significant cash flow coefficient — average firms remain financially constrained despite large cash holdings by some firms.
    - Exchange rate: Positive association between investment and the gap between break-even yen-dollar rate and actual rate; yen appreciation lowered exporters’ profitability and encouraged outward relocation.
    - Uncertainty: Investment negatively associated with forecast dispersion over the next year.
- Decomposition and economic relevance
  - Periods decomposed: 94Q3–02Q1 (downturn), 02Q1–08Q1 (upturn), 08Q1–10Q1 (downturn), 10Q1–13Q4 (upturn).
  - Findings:
    - Expectation of future profitability (Q and medium-term demand outlook) was the major driver of investment in both slumps and recoveries.
    - Improving domestic demand outlook to levels experienced in 2006/07 would raise corporate investment by about 5 percent.
    - Cash flows generally contributed positively to investment (except immediately after the global financial crisis), implying balance sheet repair and rebuilt liquidity supported investment.
    - Large uncertainty during the financial crisis contributed to sharp investment drops; reduced uncertainty supported recovery.
    - Yen appreciation after the recent crisis was a drag on investment recovery; depreciation since late 2012 contributed positively with about 3 to 4 quarter lags alongside a stock market rally.

### Policy implications and recommendations
- Policy focus areas to raise corporate investment:
  - (i) improving the demand outlook;
  - (ii) increasing the return on investment;
  - (iii) reducing uncertainty;
  - (iv) improving funding conditions to reduce the cost of capital;
  - (v) improving corporate governance.
- Role of structural reforms
  - Successful implementation of structural reforms (the third arrow of “Abenomics”) is crucial to increase private investment and raise potential growth; reforms can improve near-term private investment by boosting confidence in the medium-term domestic demand outlook even if they take time to roll out.
- Tax policy
  - A corporate income tax (CIT) rate reduction is estimated at 0.4 percent for each point of corporate income tax rate reduction based on international and Japan-specific empirical estimates of corporate tax elasticities.
  - Such a CIT rate cut is not self financing and must be part of a more comprehensive fiscal reform because the Japanese government faces tight fiscal constraints.
- Measures to reduce uncertainty and improve financing
  - Implement credible medium-term fiscal consolidation to reduce policy-related uncertainty and tail risk concerns.
  - Improve access to external financing for SMEs and service-sector firms via:
    - widening the pool of venture capital funding for start-ups in new emerging sectors;
    - broadening eligible collateral to allow securitization beyond real estate and fixed assets;
    - greater risk-based lending.
- Corporate governance reforms
  - Strengthen corporate governance to unlock corporate savings and encourage investment.
  - More ambitious measures could include expanding the use of outside directors and complementing the Stewardship Code with a corporate governance code for firms.

### Appendix II — Data definitions used in regressions
- Dependent variable: the “real investment-to-capital stock ratio” = ratio of real private investment in plant and equipment (national accounts) to real capital stock.
  - Real capital stock series: use real capital stock series in Japanese Industrial Production (JIP) database, employ economic-based approach for depreciation, and normalize by the ratio of capital stocks in national account and JIP in 1994.
  - Linear interpolation used to construct a quarterly series.
- “Tobin’s Q”: ratio of market value of equities to net worth of nonfinancial corporates. Market value proxied by stock market capitalization for the full sample period.
- “Cash flow” series: equal to (depreciation + (net operating surplus + net property income)/2) and normalized by nominal GDP.
- “Uncertainty”: standard deviation of consensus forecast over the next one year.
- “Demand outlook”: forecast for real growth rate of industry demand over the next three years in the Annual Survey of Corporate Behavior published by Cabinet Office; linear interpolation used to construct a quarterly series.
- “Exchange rate gap”: percentage difference between actual yen-dollar exchange rate and break-even yen-dollar exchange rate in the Annual Survey of Corporate Behavior; linear interpolation used to construct quarterly series.
- “Spread”: average interest rate on new loans and discounts by domestic licensed banks minus 5-year JGB yields. Bank lending rates used because bank financing has been the main channel in Japan.
- “Real policy rate”: policy rate (uncollateralized overnight call rate) minus CPI inflation.
- “Leverage ratio”: nonfinancial corporates' total liabilities divided by stock market capitalization.

*Source: _wp14141 - 1. Summary of Nonfinancial Corporate Sector Balance Sheet ..................................................5*

### 1. Summary of Nonfinancial Corporate Sector Balance Sheet ..................................................5

### 1. Summary of Nonfinancial Corporate Sector Balance Sheet ..................................................5

### Introduction
- Since the asset prices collapsed in the early 1990s, the Japanese economy experienced “Lost Decades” of slow growth, deflation, and output persistently below potential (Hayashi and Prescott, 2002).
- Japan’s GDP growth in 2000s, at an average of below 1 percent, was one of the lowest rates among advanced economies.
- Potential growth has steadily declined over this period as shrinking labor force outweighed the contributions from steady productivity gains.
- The Japanese authorities have embarked on an ambitious agenda—so called Abenomics—and successfully jumpstarted growth to 1½ percent in 2013 on aggressive monetary easing and fiscal stimulus.
- It is critical now for the economy to successfully transition from a stimulus to private sector-driven recovery.
- Because of an expected contractionary fiscal stance in the medium to long term and headwinds from Japans’ shrinking labor force due to population aging, capital accumulation and productivity gains need to become the main drivers of potential growth going forward.
- Private investment used to be an important engine of growth during Japan’s boom years in the 1980s, accounting for about a third of overall growth.
- Firms’ balance sheets were impaired significantly with the bubble burst in the early 1990s and their contribution to overall economic activity accordingly moderated over the next decade.
- Following some recovery in the mid 2000s, Japanese corporate cut back their domestic investment again after the recent global financial crisis, being a drag on growth until recently.

### Key questions addressed
- How healthy are corporate balance sheets and have legacy problems been overcome?
- Are Japanese firms sitting on large cash holdings?
- What is holding back corporate investment?

### Main findings
- Financial health of Japanese firms has improved over the last two decades. On the back of gradually improving profitability, they have deleveraged significantly while rebuilding their liquidity buffers. At the same time, their overseas investment has increased.
- Accordingly, net financial balance of Japanese firms turned into surplus since mid-1990s and has continued to improve since then. However, this improved balance sheet did not lead to higher investment until recently.
- Empirical analysis finds that firm’s expectation of demand growth outlook over the medium term is a key determinant for corporate investment.
- In this context, the successful implementation of structural reforms, the third arrow of “Abenomics,” is crucial to increase private investment and raise potential growth since it will improve confidence in the domestic demand outlook for the medium term although such measures typically take some time to roll out.

### Structure of the remainder of the paper (as described)
- Section II provides discussion on corporate sector behavior over the last three decades based on aggregate balance sheet data.
- Section III discusses empirical models to estimate the aggregate investment together with estimation results.
- Policy implications are discussed in Section IV before concluding.

*Source: _wp14141 - 1. Summary of Nonfinancial Corporate Sector Balance Sheet ..................................................5*

### Section V.

### Section V

### II. CORPORATE SECTOR BALANCE SHEET DEVELOPMENTS
- Data sources and approach
  - Closing balance sheet accounts in the national accounts provide comprehensive firm behavior since 1980.
  - Flow of funds data (Bank of Japan) allow decomposition into valuation effects and actual flows.
  - Corporate Financial Statements (Ministry of Finance) provide additional detail on net worth and retained earnings.
- Net worth and retained earnings
  - Net worth rebounded sharply in mid-2000s to levels in the late 1980s; underlying trend of net worth began improving since mid-1990s after adjusting valuation effects.
  - Retained earnings rose broadly over the last two decades in both manufacturing and nonmanufacturing sectors.
- Interpretation of retained earnings
  - Retained earnings = profits net of dividends/distributions; recorded under shareholders' equity and tend to rise unless net profit is negative or dividends exceed profit.
  - The size of retained earnings alone does not reveal resource allocation (investment vs. cash holdings) — analysis requires both asset and liability sides.
- Key balance sheet developments and magnitudes
  - Deleveraging:
    - Firms paid back about 40 percentage points of GDP in loans between 1991 and 2012.
    - Debt levels (loans and securities other than shares) as of 2012 are much lower than early 1980s.
    - Leverage ratio (total liability over net worth) fell from more than 350 percent in 1989 to about 185 percent in 2012.
  - Liquidity buffers:
    - After drawdowns in the 1990s to repay debt, firms rebuilt cash and deposit holdings in the early 2000s to levels close to the 1980s average.
    - Cash buffers rose further after the global financial crisis amid increased uncertainty.
  - Overseas expansion:
    - Overseas investment (FDI and securities) increased by more than 15 percent of GDP since mid-1990s.
    - Excluding valuation effects due to exchange rate movement, overseas investment increased by about 25 percent of GDP over this period.
    - Drivers: labor cost differentials and, more recently, host country market size.
  - Domestic capacity and fixed assets:
    - Total stock of nonfinancial assets (excluding land) was very stable between mid-1990s and mid-2000s — firms largely ceased capacity expansion in this period.
    - Firms began to invest again in mid-2000s but stagnated after the global financial crisis.
  - Valuation effects dominate financial asset swings:
    - Large increases in firms' equity holdings in the 1980s (17 to 53 percent of GDP) and early 2000s (28 to 65 percent) and the subsequent declines were almost entirely driven by valuation effects.
    - About two-thirds of the large fall in the 1990s (from 53 to 28 percent) was due to valuation effects; about one-third due to actual divestment.
    - Large swings in firms’ land holdings are also attributable to valuation effects on land prices.
- Summary conclusion
  - Firms’ cash and deposit holdings increased over the last two decades, but much less than the increase in retained earnings because profits were allocated to deleveraging, overseas investment, and domestic investment.
  - Net financial balance shifted from a deficit of about 5 to 10 percent of GDP in the 1980s to a surplus from mid-1990s, peaking at about 7¾ percent of GDP in 2003, declining to about 1¼ percent of GDP in 2008, and increasing again to about 5 percent of GDP in recent years.

### III. CORPORATE INVESTMENT
- Aggregate investment trends and context
  - During the 1980s (growth averaging 4½ percent per year), private investment accounted for more than a third of growth.
  - Total investment fell from more than 30 percent of GDP in early 1990s to about 20 percent of GDP.
  - Nonresidential (corporate) investment fell from around 20 percent of GDP to about 13½ percent of GDP as of 2013 (post-bubble period average ~14 percent).
  - The age of capital stock in manufacturing rose to 17 years (about 3-4 years older compared to the U.S.).
- Modeling approach and data
  - Quarterly data from 1993Q4 to 2013:Q4 used to focus on post-bubble developments; Chow test rejects no structural change around that period.
  - Models estimated: accelerator model, model with financial market data (funding-cost focus), and augmented Tobin’s Q model with additional variables (cash flow, exchange rates, demand outlook, uncertainty).
- Accelerator model (Table 2)
  - Up to 10 lags of output changes are statistically significant in explaining investment, indicating investment responds to desired capital stock dynamics.
  - Table 2 fit statistics:
    - R-squared 0.555
    - Adjusted R-squared 0.461
    - Durbin-Watson stat 0.343
- Model with financial market data (Table 3)
  - Regression relates real investment-to-capital ratio to bank lending spread over sovereign funding cost (Spread), real policy rate, and leverage ratio.
  - Key estimated results (Table 3):
    - Constant 11.204 (Std. Error 0.176; t-Statistic 63.824; Prob. 0.000)
    - Spread (-3) coefficient -0.776 (Std. Error 0.090; t-Statistic -8.583; Prob. 0.000)
    - Real policy rate (-1) coefficient -0.245 (Std. Error 0.048; t-Statistic -5.145; Prob. 0.000)
    - Leverage ratio (-1) coefficient -0.818 (Std. Error 0.111; t-Statistic -7.402; Prob. 0.000)
    - R-squared 0.698; Adjusted R-squared 0.686; Durbin-Watson stat 0.792
  - Interpretation: Funding-cost variables and leverage have expected negative signs and are statistically significant — improving funding conditions have supported corporate investment.
  - Note: Model fits capture only part of investment variation and residuals show serial correlation (low Durbin-Watson).
- Augmented Tobin’s Q models (Table 4)
  - Q ratio (market value of equities to net worth) with a three-quarter lag used; Q alone explains about half of corporate investment behavior.
  - Additional variables (demand outlook, cash flow, exchange rate gap, uncertainty) substantially improve fit.
  - Selected Table 4 results:
    - Q ratio (-3) coefficient examples: 1.219*** (model 2), 1.014*** (model 3), 0.724*** (model 5)
    - Demand outlook (-1), Cash flow (-1), Exchange rate gap (-4), and Uncertainty (-3) enter with expected signs and statistical significance.
    - R-squared ranges: 0.406 to 0.863 across model specifications.
    - Adjusted R-squared up to 0.863; Durbin-Watson stat up to 1.197 in best specification.
  - Economic interpretation of key variables:
    - Profitability: Investment positively associated with future profitability (Q) and medium-term demand outlook (3-year ahead more predictive than 1-year ahead).
    - Liquidity: Positive and significant cash flow coefficient — capital market incompleteness implies average firms remain financially constrained despite large cash holdings by some firms.
    - Exchange rate: Positive association between investment and the gap between break-even yen-dollar rate and the actual rate; yen appreciation lowered profitability for exporters and encouraged outward relocation.
    - Uncertainty: Investment negatively associated with forecast dispersion over the next year.
- Decomposition and economic relevance
  - Using augmented Q estimates, contributions to changes in real investment-to-capital ratio were decomposed for periods: 94Q3–02Q1 (downturn), 02Q1–08Q1 (upturn), 08Q1–10Q1 (downturn), 10Q1–13Q4 (upturn).
  - Findings:
    - Expectation of future profitability (Q and medium-term demand outlook) has been the major driver of investment in both slumps and recoveries.
    - Improving domestic demand outlook to levels experienced in 2006/07 would raise corporate investment by about 5 percent.
    - Cash flows generally contributed positively to investment (except immediately after the global financial crisis), implying balance sheet repair and rebuilt liquidity supported investment rather than crowding it out.
    - Large uncertainty during the financial crisis contributed to sharp investment drops; reduced uncertainty supported recovery.
    - Yen appreciation after the recent crisis was a drag on investment recovery; depreciation since late 2012 contributed positively with about 3 to 4 quarter lags alongside a stock market rally.

### IV. POLICY IMPLICATION
- Policy focus areas to raise corporate investment:
  - (i) improving the demand outlook;
  - (ii) increasing the return on investment;
  - (iii) reducing uncertainty;
  - (iv) improving funding conditions to reduce the cost of capital;
  - (v) improving corporate governance.
- Role of structural reforms
  - Successful implementation of structural reforms (the third arrow of “Abenomics”) is crucial to increase private investment and raise potential growth.
  - Even if reforms take time to roll out, they can improve near-term private investment by boosting confidence in the medium-term domestic demand outlook.
- Tax policy
  - Corporate income tax (CIT) reform could stimulate investment incentives (reference to Hassett and Hubbard, 2002; De Mooij and Saito (2014) mentioned in the source).

*Source: _wp14141 - Section V.*

### 0.4 percent for each point of corporate income tax rate reduction based on international and

### 0.4 percent for each point of corporate income tax rate reduction based on international and Japan-specific empirical estimates of corporate tax elasticities

### Major findings on corporate sector behavior and investment
- A corporate income tax (CIT) rate reduction is estimated at 0.4 percent for each point of corporate income tax rate reduction based on international and Japan-specific empirical estimates of corporate tax elasticities.
- Such a CIT rate cut is not self financing and must be part of a more comprehensive fiscal reform because the Japanese government faces tight fiscal constraints.
- The financial health of the Japanese corporate sector has improved over the last two decades as evidenced by:
  - gradual and steady increase of net worth and by rising retained earnings;
  - firms paid back significant amounts of debt and rebuilt liquidity buffers;
  - firms expanded abroad in the form of both FDI and securities investment.
- Improved cash holdings and liquidity buffers have not been holding back corporate investment; rather, they have contributed positively in both upturns and downturns.
- Whether current level of cash holdings is excessive is a distinct issue; weak corporate governance is identified as contributing to excessive cash holdings.

### Determinants of private corporate investment
- Private investment behavior can be well explained by fundamental variables.
- Expectation of future profitability, in particular medium-term demand outlook, is a key determinant for corporate investment.
- Reducing uncertainty would help lower the risks associated with long-term investment decisions.
  - A credible and concrete medium-term fiscal consolidation plan that removes concerns about tail risks could reduce concerns on debt overhang and potential spike in financing cost.
  - It is essential to improve the predictability of fundamental economic policies and institutions to achieve economic growth by promoting future-oriented investment.
- Improving access to external financing would lower the cost of capital for smaller firms and those in the service sector. Potential options include:
  - widening the pool of venture capital funding available for start-ups in new emerging sectors;
  - broadening eligible collateral to allow for a wider range of securitization beyond real estate and other fixed assets;
  - greater risk-based lending.
- Corporate governance reforms would help by removing bottlenecks that encourage high corporate cash holdings and prevent a more pro-growth use of resources. More ambitious measures could include:
  - expanding the use of outside directors; and
  - complementing the Stewardship Code with a corporate governance code for firms.

### Policy implications and recommendations
- Consider CIT rate reduction as part of a broader fiscal reform package because a CIT rate cut alone is not self-financing.
- Implement credible medium-term fiscal consolidation to reduce policy-related uncertainty and tail risk concerns.
- Advance structural reforms (the third arrow of “Abenomics”) to improve confidence in the domestic demand outlook for the medium term; such measures typically take some time to roll out.
- Strengthen corporate governance to unlock corporate savings and encourage investment.
- Improve access to external financing for SMEs and service-sector firms via venture capital, securitization collateral expansion, and risk-based lending.

### Appendix II — Data definitions used in regressions
- Dependent variable: the “real investment-to-capital stock ratio”, defined as the ratio of real private investment in plant and equipment (from the national accounts) to real capital stock.
  - Real capital stock series: use real capital stock series in Japanese Industrial Production (JIP) database, employ economic-based approach for depreciation, and normalize by the ratio of capital stocks in national account and JIP in 1994.
  - Linear interpolation is used to construct a quarterly series.
- “Tobin’s Q”: the ratio of market value of equities to net worth of nonfinancial corporates. Market value of equities proxied by stock market capitalization for the full sample period.
- “Cash flow” series: equal to (depreciation + (net operating surplus + net property income)/2) and normalized by nominal GDP.
- “Uncertainty”: a standard deviation of consensus forecast over the next one year.
- “Demand outlook”: a forecast for real growth rate of industry demand over the next three years in the Annual Survey of Corporate Behavior published by Cabinet office; linear interpolation used to construct a quarterly series.
- “Exchange rate gap”: percentage difference between actual yen-dollar exchange rate and break-even yen-dollar exchange rate in the Annual Survey of Corporate Behavior; linear interpolation used to construct quarterly series.
- “Spread”: average interest rate on new loans and discounts by domestic licensed banks minus 5-year JGB yields. Bank lending rates used because bank financing has been the main channel in Japan.
- “Real policy rate”: policy rate (uncollateralized overnight call rate) minus CPI inflation.
- “Leverage ratio”: nonfinancial corporates' total liabilities divided by stock market capitalization.

*Source: IMF working paper content provided in the supplied PDF excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14141.pdf_