We examine the role of bank loans in the Japanese economy by analyzing the lending behavior of banking firms and the investment behavior of non-financial firms. As for the banks' behavior, we construct a dynamic model of lending and test a variety of behavioral hypotheses on the bank's loan supply based on the panel data set over 1976 to 1995. Our main finding is that the lending behavior is quite different by types of banks and of borrowers. For regional banks the bank loans are sensitive to deposits, indicating that they face imperfections in capital market. For major banks such as city banks, real estate plays a vital role as collateral in loan contracts. We also find that loans to small and/or non-manufacturing firms are more dependent on real estate as collateral and sensitive to the deposit growth. It is inferred that real estate functions as a device to reduce the agency cost stemming from the asymmetric information between borrowers and banks. We also find that expenditure on fixed investment is much more sensitive to bank loans for small firms than for large firms. Our simulation exercises demonstrate that cut of loan supply is largely responsible for the stagnancy of investment in the downturns after the burst of the bubble and the financial turmoil in 1997. To sum up, lending channel is indeed important in Japan in propagating the shocks in the asset markets to the real economy.
This study re-evaluates the role of the stock market in Japanese corporate investment decisions based on time-series data. Employing the time-series technique, we examine why the performance of Tobin's average q-type investment function is poor. We construct a series of average q and another of marginal q (a more fundamental pro®tability measure of investment) and investigate the relationship between the two. A cointegrating relationship is not detected between the two measures, both of which have a unit root. The divergence of average q from marginal q is not narrowed even if the imperfect competition of the output market is taken into consideration. We also examine which q measure is more relevant to Japanese corporate investment decisions by estimating separately the investment function with two measures of q as an explanatory variable. The estimation results show that entrepreneurs place more emphasis on marginal q than on average q in investment decisions. JEL Classi®cation Number: E22.
The long-run equilibrium relationship among money, income, prices, and interest rates in Japan is investigated by the threshold cointegration test, which allows for asymmetric adjustment, introduced by Enders and Siklos (2001). The threshold cointegration approach provides clear evidence of the cointegration relationship characterized by asymmetric adjustment. By allowing for asymmetric adjustment, results are obtained showing the stability of the money demand function, similar to Lucas (1988), who pointed out that the money demand function is stable if unit income elasticity is imposed. In particular, the estimated results show that the adjustment process toward equilibrium is highly persistent above an appropriately estimated threshold, whereas the adjustment process toward equilibrium quickly converges below it. This finding indicates that deviations from equilibrium resulting from increases in money or decreases in income and prices are highly persistent.
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