Government financial institutions and capital allocation efficiency in Japan

Abstract

This paper uses the industry-level panel data from 1975-2005 and estimates Wurgler's η, the elasticity of industry investment to value-added, for each of Japan's 47 prefectures. We find that Wurgler's η varies considerably across prefectures even though there is no regulatory restriction on inter-regional flow of financial capital. Moreover, exploiting cross-prefecture variation in Wurgler's η, we show that the share of government loans is strongly and negatively correlated with the quality of capital allocation. We also find that this negative correlation is robust to controlling for local economic and financial development, and more pronounced in declining industries than growing industries. Moreover, the share of government loans is positively correlated with investment-to-output ratio but negatively correlated with total factor productivity growth. Taken as a whole, the results are broadly consistent with the view that Japan's government financial institutions stimulate investment in declining industries while distorting capital allocation and reducing overall productivity growth.Comments from Wako Watanabe, Hideo Yunoue, Tomomi Miyazaki, Yuri Sasaki, and seminar participants at Wesleyan University, the Cabinet Office of Japan, the Japanese Economics Association Meeting (2019) are gratefully acknowledged. All errors are mine.

Research into the Mechanism for the Impact of Climate Change on Systemic Risk—A Case Study of China’s Small- and Medium-sized Commercial Banks

“…For instance, Agusman A. et al (2014) pointed out that the Indonesian government adopted a preset quota policy to inject capital to selected banks so as to eliminate the NPLs of problem banks and reduce credit risk [54]. In contrast, Imai M. (2020) deemed that the administrative intervention of the Japanese government severely distorted capital allocation and slowed down productivity [55]. In addition, Feng L. et al (2019) focused on large Chinese financial institutions and assumed that government intervention promoted financial access and encouraged bribery [56].…”