Business Sentiments and Investment Behavior in Small and Medium Enterprises

This paper employs a unique firm survey dataset to investigate how subjective perceptions held by Japanese small and medium enterprises affect their real investment behavior. We identify both the usefulness of sentiments for prediction and which types of sentiment play a significant role. The results indicate that perceptions of long-term improvements in business conditions are required for manufacturing firms to invest and that the level of current business conditions, rather than their change, is a significant factor. These findings reveal the kinds of perceptions that contain useful information on economic fundamentals (or animal spirits) among the many possible forms of business sentiment.