The liquidity/stock returns linkage was studied using data from the First Section, the Second Section, and the Mothers Section of the Tokyo Stock Exchange (TSE). In our overall tests, we found a significantly negative (positive) relationship between liquidity (illiquidity) proxies and returns. Upon exploring this further for the impact of business cycles, we found that while the expansionary phases largely confirm the overall finding, contractionary phases do not. When we controlled for liquidity variability in the cross-sectional regressions, the role of the liquidity level showed strong significance across business cycles, different subperiods and all Sections of the TSE. With regard to liquidity variability, we observed a strongly significant and negative association with stock returns.