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The Bright and Dark Side of Financial Support from Local and Central Banks after a Natural Disaster: Evidence from the Great Kanto Earthquake, 1923 Japan

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  • Tetsuji Okazaki
  • Toshihiro Okubo
  • Eric Strobl

Abstract

Natural disasters can seriously damage firms as well as the banks that they use independent of their size. However, it is small- and medium-sized firms in particular that will be affected by this because they tend to be financially constrained and thus greatly depend on these potentially damaged local banks for financing. In this paper, we focus on the Great Kanto Earthquake of 1923, which resulted in serious damage to small- and medium-sized firms and banks in Yokohama City, to investigate how effective the provision of loans by local banks, as well as the Earthquake Bills policy implemented by the Bank of Japan, was in helping firms recover. Using linked firm- and bank-level datasets, we find that larger local banks allowed damaged firms to survive and grow. The Earthquake Bills policy mitigated the negative impact of bank damage on firms and prevented credit crunch, although this deteriorated the balance sheet of local banks and resulted in financial instability and a banking crisis as a side effect.

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  • Tetsuji Okazaki & Toshihiro Okubo & Eric Strobl, 2021. "The Bright and Dark Side of Financial Support from Local and Central Banks after a Natural Disaster: Evidence from the Great Kanto Earthquake, 1923 Japan," CIGS Working Paper Series 21-001E, The Canon Institute for Global Studies.
  • Handle: RePEc:cnn:wpaper:21-001e
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    Cited by:

    1. Hunter, Janet, 2023. "Thinking about the economic consequences of the Great Kanto Earthquake," LSE Research Online Documents on Economics 124668, London School of Economics and Political Science, LSE Library.

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • N25 - Economic History - - Financial Markets and Institutions - - - Asia including Middle East
    • N85 - Economic History - - Micro-Business History - - - Asia including Middle East

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