  We explore what causes business cycles by analyzing the Japanese industrial
production data. The methods are spectral analysis and factor analysis. Using
the random matrix theory, we show that two largest eigenvalues are significant.
Taking advantage of the information revealed by disaggregated data, we identify
the first dominant factor as the aggregate demand, and the second factor as
inventory adjustment. They cannot be reasonably interpreted as technological
shocks. We also demonstrate that in terms of two dominant factors, shipments
lead production by four months. Furthermore, out-of-sample test demonstrates
that the model holds up even under the 2008-09 recession. Because a fall of
output during 2008-09 was caused by an exogenous drop in exports, it provides
another justification for identifying the first dominant factor as the
aggregate demand. All the findings suggest that the major cause of business
cycles is real demand shocks.
