Does the deterioration in bank health reduce the client firm investment? If so, how large is the effect? We answer these questions for Japanese small manufacturing firms over the period 2001-2003. We find that a firm tends to reduce investment as its main bank deteriorates financial conditions, after controlling for the firm's sales growth, cash flow and the ratio of debt to market-valued total assets. If a major bank exhibits a decline in the capital ratio margin over the required level by 1 percent point, the client firm reduces its investment ratio by about 2.2 percent points. In the case of the firms with its main bank being a credit bank or a credit union, an increase in the bank's non-performing loan ratio by 1 percent point decreases the client firm's investment ratio by 0.43 percent points. On the other hand, for the firms with its main bank being a regional bank, we do not find a significant effect of bank balance sheets on the firm investment.