This leads to a breakdown in the ordinary monetary transmission mechanism of policy rate change. To see this, let me first consider corporate investment in Japan. Figure 3.1 depicts manufacturing investment by the corporate sector. The shaded areas indicate recession, the black line is manufacturing investment in real terms, and the blue line shows the time profile of the policy rate.
This figure shows that the policy rate cut prevented investment from falling sizably in the three business cycles before the bubble. In contrast, after the bubble burst, a sharp decline in the policy rate clearly failed to prevent a sharp decline in investment. Basically, the same picture is found in the corporate sector’s non-manufacturing investment (Fig. 3.2).