Financial Heterogeneity and the Dynamics of Credit Rationing in Japan

Abstract

A perceptual gap between banks and firms exists in Japan, preventing the credit channel of monetary policy. Banks believe that bankable customers are scarce, while firms believe that banks do not issue loans without collateral or guarantees. To explain this gap, I focus on the dispersion in the degree of financial constraints across listed Japanese firms from FY1991 to FY2015. I construct a firm-specific and time-varying measure of financial constraints through the structural estimation, and investigate its distribution over time. The results reveal a right-skewed distribution for the index of financial constraints, indicating that many firms face minor financial constraints, while a few face severe financial constraints. The spread between the 75th and 25th percentiles of the index of financial constraints increased after the bubble burst, indicating that Japan's financial heterogeneity is becoming outstanding recently. Finally, decomposing financial heterogeneity into within- and between-industry effects shows that the observed financial inequality is due to the increase in inequality among firms within narrowly defined industries.

Keywords: between-industry effects, credit rationing, financial inequality, firm investment, within-industry effects

JEL Classification: D24, D25, G31