### 1. Introduction

One of the salient characteristics of the Japanese economy in the middle of 1980's to early 90's is volatile movement of asset prices, as is typically observed in the land market and the stock market. In the fourth quarter of 1986 the Tokyo Stock Exchange Price Index (TOPIX) stood at 1466.79 and it soared up to 2751.17 in the fourth

of 1989. The average rate of increase amounted to 23.3% per annum. As for the land price, the Land Price Index of Six Largest Cities started at 42.6 in September of 1986 and reached 105.1 in September of 1990. The average rate of increase was 25.3% per annum. Soaring asset prices were followed by precipitation of them. The TOPIX fell down to 1276.93 in the third quarter of 1992 at the rate of 26.9% per annum. The land price also fell at the rate of 13.9% per annum from September of 1990 to September of 1993.

In the period of soaring asset prices high growth of GNP was also attained. The growth rate of real GNP exceeded over 4% every year from 1987 to 1991. However, as the asset prices declined continuously, the Japanese economy plunged into deep recession. The growth rate of real GNP was no more than 1.4% in 1992 and the growth rate of GNP in 1993 was almost zero. Casual observations of the Japanese economy might lead to the assertion that the real economic activities are closely intertwined with the asset markets. This observation has attracted researchers' attention to the role of asset markets in the business fluctuations.

This study is an empirical attempt to examine the relationship of the asset markets with real economic activities in the Japanese economy. In particular we focus on the role of asset markets in business investment decision.

In corporate finance literature Modigliani-Miller theorem is one of the most celebrated theorem according to which the level of investment is independent of the financing method. $ ^{1)} $ Underlying the Modigliani-Miller theorem is an assumption of perfect capital market where there is no informational gap among participants in the capital market. However doubt has been cast on this assumption and recent theoretical development along this line demonstrates that when there exists asymmetric information between debtors and creditors then the level of investment is no longer independent of the way of financing and that the firm may face borrowing constraints. $ ^{2)} $ The constraints the firm faces, however, can be mitigated by the internal cash flow or/and the collateralizable net worth held by the firm. The upshot is that the level of business investment is no longer independent of the financing method and hinges upon the factors to influence the financial constraints.

It has been frequently asserted in Japan without rigorous analysis that land asset is an important collateral for borrowings. $ ^{3)} $ If it is the case, then it is expected that corporate investment in Japan is much affected by the level of land asset held by the firm. Moreover the surge in corporate investment in the middle of 1980's to early 90's and stagnancy thereafter may be partially attributed to the movements of land prices. Thus in addition to the traditional role of the stock market in corporate