Appended Note 1-3 Factors that Determine Business Investment

Effects of outlook for business conditions and cash flow on business investment are estimated by using the following equation.

(1) Estimation equation: I/K =+CF/K +GDI (All sizes/all industries)

• I: Business investment (Financial Statements Statistics of Corporations by Industry, Quarterly, Ministry of Finance)
• K: Value of (construction in process account + other tangible fixed assets) as of the end of previous term (Financial Statements Statistics of Corporations by Industry, Quarterly, Ministry of Finance)
• CF: Cash flow = Ordinary profit / 2 + Depreciation allowance (Financial Statements Statistics of Corporations by Industry, Quarterly, Ministry of Finance)
• GDI: Business conditions (outlook) of all industries, all sizes (Tankan, Bank of Japan) I/K and CF/K are seasonally adjusted. For CF/K, one quarter lag of the previous quarter was taken and three quarter Almon lags were used. For GDI, three quarter lags were used. Assumed that the error term follows one autoregression.

(2) Estimation result (Estimation period is from the second quarter of 1981 to the second quarter of 2001)