"Credit Crunch"?: Details from Borrower Quarterly Financial Data about What Actually Happened in Japan during 1997-1999

After "the Burst of the Bubble," Japan entered a long period of stagnation in 1990s, which observers call "the Lost Decade." This "Lost Decade" ended with "the Financial Crisis," after which the Koizumi Cabinet aggressively pursued a policy designed to reduce the amount of "bad loans" held by banks. Some observers now argue that other governments should learn from Japan's successful experience in their own fight against "the sub-prime loan" problem. What actually occurred in Japan during the Lost Decade and after, however, is neither well-known nor well-understood. This is particularly true of "the Financial Crisis" period. Observers have focused on the bad loans, which could cause some big banks to fail, and assumed that their failure would cause grave turmoil in the financial markets. During "the Financial Crisis" the government did pour large amounts of public funds into bank rescues, arguing that a "credit crunch" would otherwise seriously hurt the economy. And although the government took time to enforce the policy, the Japanese economy soon began to recover. Thus, "the Financial Crisis" period has become a turning point both for Japan's policy toward bank regulation and for related policy debates. Using firm-level quarterly financial data, this paper investigates the details of what actually occurred in firm financing behavior during 1994-2000. We focus particularly on how seriously, when, in what way, and where a "credit crunch" affected firm behavior. What would happen to the conventional wisdom about the Lost Decade if the troubles in the financial institutions and the related policies during the period had no serious effect on the real economy? Yet nowhere do we find a clear indication of any serious "credit crunch." In particular, we find no indication of such a phenomena from the 4th quarter of 1997 to the 1st quarter of 1999. We use quarterly financial data on about 6,000 non-financial firms with over 600 million yen in paid-in capital from Hojin Kigyo Tokei Kiho (Corporate Enterprise Quarterly Statistics) of the Ministry of Finance. We conclude with questions to various sides of the conventional view, including the purported success of Japanese policy toward the Financial Crisis and bank bad-loan reduction, the debate on the causes and consequences of the Lost Decade, and the postwar policy discipline consistently applied to financial regulation.