Does a cointegrating M(2) demand relation really exist in Japan?

This paper analyses whether in fact a cointegrating M2 demand relation exists in postwar Japan with an extensive sensitivity analysis. A conventional trivariate relationship of M2 demand as well as a bivariate relation of M2 velocity are investigated with three sample periods to consider possible structural changes in the late 1980s. Based on three testing methods and two lag structures, virtually no evidence supports M2 cointegration except for the possibility of M2 velocity cointegration prior to 1985. Accordingly, an M2 error-correction approach is no longer appropriate to investigate short-run dynamics of the model in the late 1980s. (C) 1996 Academic Press, Inc.