The underlying causes of sharp declines in bank lending during recessions in large developed economies, as exemplified by the U.S. in the early 1990s and Japan in the late 1990s, are still being debated due to the lack of any convincing identification strategy of the supply side capital-lending relationship from lending demand. Using within bank share of real estate lending in the late 1980s as an instrumental variable for bank capital, we find that Japanese banks cut back on their lending in response to a large loss of bank capital in fiscal year 1997. Copyright 2007 The Ohio State University.

In this paper, we analyze a variety of data on saving motives, bequest motives, and bequest division from the "Comparative Survey of Savings in Japan and the United States," a binational survey conducted in 1996 by the Institute for Posts and Telecommunications Policy of the Ministry of Posts andTelecommunications of the Government of Japan, in order to shed light on which model of household behavior applies in the two countries. We find (1) that the selfish life cycle model is the dominant model of household behavior in both countries but that it is far more applicable in Japan than it is in the U.S., (2) that the altruism model is far more applicable in the U.S. than it is in Japan but that it is not the dominant model of household behavior in either country, and (3) that the dynasty model is more applicable in Japan than it is in the U.S. but that it is of only limited applicability even in Japan.

Current theoretical and empirical research suggests that small banks have a comparative advantage in processing soft information and delivering relationship lending. The most comprehensive analysis of this view found using U.S. data that smaller SMEs borrow from smaller banks and smaller banks have stronger relationships with their borrowers (Berger, Miller, Petersen, Rajan, and Stein 2005) (BMPRS). We employ essentially the same methodology as BMPRS on a unique Japanese data set and obtained findings that are quite interesting from an international comparison point of view. We found like BMPRS that larger firms tend to borrow from larger banks. However, unlike BMPRS we did not find that this was because larger firms are more transparent. Together these results imply that large banks do not necessarily have a comparative advantage in extending transactions-based lending. We also found like BMPRS that smaller banks have strong relationships with their borrowers. However, we find that banking relationships in the U.S. and Japan are strong in somewhat different dimensions. Our paper clarifies these and other interesting similarities and differences between the U.S. and Japan.

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