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The International Transmission of Financial Shocks: The Case of Japan

  • Joe Peek

    ()

    (Boston College)

  • Eric S. Rosengren

    (Federal Reserve Bank of Boston)

One of the more dramatic financial events of the late 1980s and early 1990s was the surge in Japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent. While the unprecedented fluctuations in Japanese stock prices were domestic financial shocks, the unique institutional characteristics of the Japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the Japanese banking system. The large size of Japanese bank lending operations in the United States enables us to use U.S. banking data to investigate the extent to which this domestic Japanese financial shock was transmitted to the United States, as well as to identify a supply shock to U.S. bank lending that is independent of U.S. loan demand. We find that binding risk-based capital requirements associated with the decline in the Japanese stock market resulted in a decline in commercial lending by Japanese banks in the United States that was both economically and statistically significant. This finding has added importance given the severe real estate loan problems currently faced by Japanese banks. How Japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the United States as well as in other countries with a significant Japanese bank presence.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 357.

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Length: 37 pages
Date of creation: Sep 1996
Date of revision:
Publication status: published, American Economic Review, 87:4, Sept. 1997.
Handle: RePEc:boc:bocoec:357
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  1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  2. Daniel E. Nolle & Rama Seth, 1996. "Do banks follow their customers abroad?," Research Paper 9620, Federal Reserve Bank of New York.
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  12. Joe Peek & Eric S. Rosengren, 1995. "Banks and the availability of small business loans," Working Papers 95-1, Federal Reserve Bank of Boston.
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