Shocks and Shock Absorbers in Japanese Bonds and Banks During the Global Financial Crisis

During the global financial crisis (GFC), Japan and the U.S. differed in at least two important ways: (1) while markets were stable in Japan then, the bubbles in the U.S. housing and financial markets burst and (2) while Japanese banks suffered few losses, huge losses badly weakened U.S. banks. In addition, and unlike the U.S., Japan requires firms' balance sheets to show, not only their total debt, but also the components of their debt: bonds, loans, and other debt. We used data for listed, non-financial, Japanese firms' bonds, bank loans, and other debt to investigate whether the 2008 "Lehman shock" in the U.S. disrupted Japanese bond markets. The Japanese data al-lowed us to estimate how much the Lehman shock affected Japanese firms' bonds outstanding and issued and to estimate how much, in turn, the Lehman shock resulted in firms' getting more loans from Japanese banks. The estimates revealed important cross-currents during the crisis. Our estimates implied that, while the crisis reduced bond issuance, it was accompanied by enough more bank loans to raise total debt. During the crisis, both bonds outstanding and bond issuance responded less to prior bond shortfalls and responded less to their maturing bonds. Second, while it greatly reduced bonds issued and outstanding at smaller, listed firms, the crisis boosted them at the very largest firms. In contrast, bank loans then rose more at smaller firms. Third, bank loans rose more, and bonds outstanding fell more, at firms with greater exposure to foreign sales. Fourth, the crisis led firms, and especially larger firms, to hold more cash and fewer securities and to reduce costs. Fifth, capital expenditures generally declined during the crisis, but declined significantly less at larger firms.