### 1 \. Introduction

In recent years attention has been revived to a role of wealth in consumers' spending. This is mostly due to a parallel movement of consumption spending and asset prices starting from the middle of 1980's. The annual growth rate of final consumption expenditure of households exceeded 4% from 1987 to 1990, which is characterized as the second longest boom in the post-war period, while it slowed down to at most 2% from 1991 to 1993 when the Japanese economy plunged into a severe recession. The time series path of the annual growth rate of final consumption expenditure of households is shown in Figure 1.

On the other hand, one of the salient characteristics of the Japanese economy in the middle of 80's to early 90's is a volatile movement of asset prices. The average rate of increase of the Tokyo Stock Exchange Price Index (TOPIX) amounted to 23.3 % per annum from the start of business upturns (the fourth quarter of 1986) to the peak (the fourth quarter of 1989). As for the land price, the Land Price Index of Six Largest Cities rose at the rate of 25.3 % per annum from September of 1986 to September of 1990. Soaring asset prices were followed by precipitation of them. The TOPIX fell at the rate of 26.9 % per annum from the peak period to the third quarter of 1992. The land price also fell at the rate of 13.9 % per annum from September of 1990 to September of 1993.

Therefore it is no wonder to think that the high growth and subsequent stagnancy of final consumption in the recent phases of business cycles might be closely linked with the conditions in the asset markets. These economic conditions in Japan have motivated a lot of empirical researches on the role of wealth in consumers' spending: an old theme in the theory of consumers' behavior. $ ^{1)} $

This study is an attempt to estimate the effect of household wealth on consumption so called “wealth effect”. This study contributes to the existing literature on this topic in the following points. First of all, most of the studies in the past have not paid much attention to the type of wealth held by the households. This is partly due to the theory of consumers upon which empirical works are based, that is life-cycle permanent income hypothesis (abbreviated as LCY-PIH hereafter). $ ^{2)} $ The LCY-PIH is one of the most celebrated theory that has solid theoretical background. In the LCY-PIH total wealth is the only relevant concept of wealth that matters for the households in allocating the resources over the lifetime. The concept of total wealth is very comprehensive in that it includes not only financial and tangible assets but also human wealth.

However empirical support to the LCY-PIH is not so prevalent as economists expect. There have been evidence accumulated that a sizable portion of households are liquidity-constrained. $ ^{3)} $ Then the upshot is that the composition of households wealth is important, since the degree of liquidity varies among assets. For example tangible assets are far more illiquid than financial assets. We estimate the effects of household wealth on consumption by taking the composition of wealth into consideration. $ ^{4)} $

Secondly one of the difficulties we encounter in measuring the size of wealth effect of different