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Bank Lending and Economic Activity in Japan: Did 'Financial Factors' Contribute to the Recent Downturn?

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  • Brunner, Allan D
  • Kamin, Steven B

Abstract

In this paper, we examine the role of "financial factors" in Japan and attempt to gauge their recent impact on the Japanese economy. First, we find that proxies for financial factors enter significantly in behavioural equations for loan standards, loan demand, and aggregate demand. Second, we find strong evidence that financial factors contributed to Japan's recent recession. On the loan supply side, exogenous declines in equity prices appear to have led to a sharp increase in bank loan standards and a substantial subsequent decline in loans and economic activity. We also find some evidence that an exogenous contraction in loan supply may have lowered output by a small degree, but only in the early phases of the recession. On the loan demand side, asset price declines also led firms and households to sharply reduce their demand for bank loans and goods, although it is unclear how much this influence may reflect traditional wealth effects. In addition, loan demand shocks, which could reflect balance-sheet problems not captured by our model, account for much of the remainder of the shortfall in loans. Copyright @ 1998 by John Wiley & Sons, Ltd. All rights reserved.

Suggested Citation

  • Brunner, Allan D & Kamin, Steven B, 1998. "Bank Lending and Economic Activity in Japan: Did 'Financial Factors' Contribute to the Recent Downturn?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(1), pages 73-89, January.
    • Handle: RePEc:ijf:ijfiec:v:3:y:1998:i:1:p:73-89
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    Cited by:

    1. Michael Frömmel & Torsten Schmidt, 2006. "Bank Lending and Asset Prices in the Euro Area," RWI Discussion Papers 0042, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
    2. Ramkishen S. Rajan & Reza Siregar & Iman Sugema, 2003. "Why was there a precrisis capital inflow boom in Southeast Asia?," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(3), pages 265-283.
    3. Ito, Takatoshi & Sasaki, Yuri Nagataki, 2002. "Impacts of the Basle Capital Standard on Japanese Banks' Behavior," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 372-397, September.
    4. Frömmel, Michael & Schmidt, Torsten, 2006. "Bank Lending and Asset Prices in the Euro Area," Hannover Economic Papers (HEP) dp-342, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    5. Robert Guttmann, 2011. "Basel II: A New Regulatory Framework for Global Banking," Chapters, in: Claude Gnos & Louis-Philippe Rochon (ed.), Credit, Money and Macroeconomic Policy, chapter 8, Edward Elgar Publishing.
    6. Brunner, Allan D. & Kamin, Steven B., 1996. "Determinants of the 1991-1993 Japanese recession: Evidence from a structural model of the Japanese economy," Japan and the World Economy, Elsevier, vol. 8(4), pages 363-399, December.
    7. Nobuhiro Kiyotaki & Kenneth D. West, 1996. "Business Fixed Investment and the Recent Business Cycle in Japan," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 277-344, National Bureau of Economic Research, Inc.
    8. Alan G. Ahearne & Joseph E. Gagnon & Jane Haltmaier & Steven Scott MacDonald, 2002. "Preventing deflation: lessons from Japan's experience in the 1990s," International Finance Discussion Papers 729, Board of Governors of the Federal Reserve System (U.S.).
    9. Kwon, Eunkyung, 1998. "Monetary Policy, Land Prices, and Collateral Effects on Economic Fluctuations: Evidence from Japan," Journal of the Japanese and International Economies, Elsevier, vol. 12(3), pages 175-203, September.
    10. Ryan A. Compton & Jose Ricardo da Costa & Silva, 2005. "Finance and the Business Cycle: a Kalman Filter Approach with Markov Switching," Working Papers Series 97, Central Bank of Brazil, Research Department.

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