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Efficiency of Credit Allocation and Effectiveness of Government Credit Guarantees: Evidence from Japanese Small Businesses

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  • Uesugi, Iichiro

Abstract

This paper empirically examines the development of credit allocation amongst Japanese small- and medium-sized enterprises (SMEs), and the relationship between credit allocation and economic efficiency. We first investigate whether the credit market is inefficient, in that the survival of underperforming firms force better-performing firms to exit the market. Secondly, we test whether government credit guarantee programs are beneficial. In other words, do these programs increase the funds available to SMEs, and, more importantly, do they significantly impact the profitability of program users? Using a pair of unique firm-level datasets, we come to two major conclusions. (1) The selection mechanism in the Japanese credit market is efficiency-improving in that lower quality firms with higher borrowing costs are more likely to default. (2) The massive credit guarantee program implemented by the Japanese government in the late 1990s did result in the increased availability of funds to SMEs, and to the greater profitability of creditworthy firms. Moreover, interest rates do not decrease among program users indicating that government interest payment subsidies are not attributed fully to borrowers.

Suggested Citation

  • Uesugi, Iichiro, 2008. "Efficiency of Credit Allocation and Effectiveness of Government Credit Guarantees: Evidence from Japanese Small Businesses," PIE/CIS Discussion Paper 353, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:piecis:353
    Note: January 31, 2008
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    References listed on IDEAS

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    1. Nishimura, Kiyohiko G. & Nakajima, Takanobu & Kiyota, Kozo, 2005. "Does the natural selection mechanism still work in severe recessions?: Examination of the Japanese economy in the 1990s," Journal of Economic Behavior & Organization, Elsevier, vol. 58(1), pages 53-78, September.
    2. MATSUURA Katsumi & HORI Masahiro, 2003. "Special Credit Guarantee and Restructuring of Small Firms(in Japanese)," ESRI Discussion paper series 050, Economic and Social Research Institute (ESRI).
    3. Iichiro Uesugi & Koji Sakai & Guy M. Yamashiro, 2006. "Effectiveness of Credit Guarantees in the Japanese Loan Market," Discussion papers 06004, Research Institute of Economy, Trade and Industry (RIETI).
    4. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 455-470.
    5. Alan Ahearne & Naoki Shinada, 2005. "Zombie firms and economic stagnation in Japan," International Economics and Economic Policy, Springer, vol. 2(4), pages 363-381, December.
    6. Arito Ono & Iichiro Uesugi, 2005. "The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's Small Business Loan Market," Discussion papers 05027, Research Institute of Economy, Trade and Industry (RIETI).
    7. Cowling, Marc & Mitchell, Peter, 2003. "Is the Small Firms Loan Guarantee Scheme Hazardous for Banks or Helpful to Small Business?," Small Business Economics, Springer, vol. 21(1), pages 63-71, August.
    8. Sakai, Koji & Uesugi, Iichiro & Watanabe, Tsutomu, 2010. "Firm age and the evolution of borrowing costs: Evidence from Japanese small firms," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1970-1981, August.
    9. Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August.
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    Cited by:

    1. International Monetary Fund, 2012. "Japan; Selected Issues," IMF Staff Country Reports 12/209, International Monetary Fund.
    2. Karel Janda, 2011. "Credit Rationing and Public Support of Commercial Credit," CERGE-EI Working Papers wp436, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Karel Janda, 2011. "Credit Guarantees and Subsidies when Lender has a Market Power," Working Papers IES 2011/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2011.
    4. Waikei R Lam & Jongsoon Shin, 2012. "What Role Can Financial Policies Play in Revitalizing SMEs in Japan?," IMF Working Papers 12/291, International Monetary Fund.
    5. De Veirman, Emmanuel & Levin, Andrew T., 2012. "When did firms become more different? Time-varying firm-specific volatility in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(4), pages 578-601.

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