EIS, the second stream focuses the “indirect effect” in their evaluation of wealth effects on consumption. Poterba and Samwick (1995) offer evidence that the direct effect is small. Among the luxury goods they studied, only new car purchase is significantly correlated with stock price movements and this relationship reflects the fact that stock market movements predict consumer demand. Successive studies such as Starr-McCluer (1998) and Otoo (1999) report smaller or little difference in spending by stockholders and non-stockholders. Poterba (2000) argues that the indirect effect is more difficult to quantify than the direct one.

With reference to the opposing view by two streams, i.e., direct vs. indirect, Dynan and Maki (2001) proposed a way to empirically evaluate the relative importance of the two channels of the “wealth gain/loss effects” on consumption. They take advantage of household-level data from the Consumer Expenditure Survey (CEX), and adopt the Mankiw-Zeldes framework to test the “direct effect” by examining whether there is a difference in the consumption response of stockholders and non-stockholders to the stock prices movements. At the same time, they try to evaluate the “indirect effect” by examining stock prices as a leading indicator of future wages. Their findings demonstrate that the direct surfaces quickly and stimulate spending for a number of quarters but the indirect effects is not important for consumption growth. They also report that an additional dollar of stock market wealth stimulates consumption by between 5 and 15 cents.

As regards Japan, Ando et al. (1986) is the leading study on consumption wealth effects. They use micro-level cross-section data from the National Survey of Family Income and Expenditure and find that the estimated marginal propensity to consume out of asset is estimated to be less than 0.05. More recently, Ogawa and Kitasaka (1998) use prefecture-level data for 1980, 1985 and 1990 to regress real consumption on various types of asset gains/losses, disposal income and household demographics, and found wealth effect in financial capital gains/losses is significant but that in real assets movements is ambiguous. The MPC out of liquidity assets (deposits plus securities minus debts) is estimated to be about 0.05. More recently, Institute of Industry (2003) follows the same procedure to estimate the MPCs in 1990s and concludes that the MPC out of financial assets and real assets is around 0.01.

In this paper, making use of an annual panel data from the JPSC, we basically employ the framework proposed by Dynan and Maki (2001) that dealt with both channels clearly and compared the effects. Since the crash in the 1990s in Japan substantially diminished households' expectation and raised anxiety for future income, our starting hypothesis is that both channels matter in Japan. If we focus only on the estimates of EIS, we might discard the possible indirect channel so that the effect of the asset market crash would be underestimated. Moreover, we will examine not only the wealth effects from stock prices but also those from real estate prices. Previous studies focused on stock prices rather than real asset prices probably because real