Japanese Foreign Investment and the "Land Bubble."

The aim of this paper is to examine the determinants of Japanese net long-term capital flows in the 1980s and early 1990s. A basic framework is proposed which takes account of Japan's so-called land bubble by incorporating the interaction of land with the banking sector in a macroeconomic portfolio model of capital flows. Empirical evidence is supportive of the hypothesis that land-related bank loans have been a major determinant of Japanese net long-term foreign investment. The hypothesis of substitution between direct and indirect foreign investment also receives support, and areas of future research are mentioned. Copyright 1994 by Blackwell Publishing Ltd.