Monetary Liquidity, Bank Credit, Corporate Leverage and Asset Prices in Japan, 1980–2000: A Vector Autoregression Analysis

From the 1980s to the early 2000s, Japan experienced a real estate bubble followed by a prolonged period of economic stagnation known as the "lost decade". This study examines the dynamic relationships among monetary liquidity, bank credit, corporate leverage, asset prices and real economic activity in Japan between 1980 and 2000. Using quarterly data from official sources covering 1980Q1 to 2000Q4, it estimates a six-variable vector autoregression (VAR) comprising M2, bank credit, corporate leverage, a real estate price index, the Nikkei 225 and real gross domestic product (GDP). Together, the variables represent a possible transmission sequence from monetary liquidity and bank credit to asset prices, corporate balance sheets and real economic activity. The estimated equations differ markedly in explanatory power. The real estate price equation has the strongest in-sample fit, with an adjusted R² of 0.672, and the first lag of M2 is positive and statistically significant at the 1% level in that equation. A positive change in real estate price growth is associated with a higher change in GDP growth in the following quarter, and a positive change in corporate leverage is associated with a higher change in bank credit growth two quarters later. By contrast, the M2 equation is not jointly significant, and the system does not explain changes in M2 well. Unit-root tests support first-differencing; the M2–real estate and real estate–GDP relationships persist with three lags, but the leverage–credit relationships weaken. These relationships are reported as dynamic associations rather than as evidence of causation.