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Trading companies as financial intermediaries in Japan

  • Ono, Masanori

This paper explores a financial role of Japanese general trading companies (GTCs), which act as a central point in a distribution network among group firms. I examine Meltzer’s conjecture, which holds that financially strong companies like GTCs increase trade receivables and reduce trade payables to shield their trading partners from a monetary squeeze. First, I investigate the trade credit granted to each other by GTCs and all its trade partners. The panel estimation demonstrates that both trade receivables and trade payables decrease during periods of monetary tightness and increase during those of monetary ease. In response to a change in a bank-lending indicator, there is little difference between trade receivables and payables. Thus GTCs become neither net-credit providers nor net-credit takers from this behavior. In other words, interfirm financing passing through a GTC’s balance sheet positively correlates with banking financing. Therefore, the Meltzer hypothesis does not hold for transactions between GTCs and all their trade partners. Instead, gross trade credit functions as a complement to macroeconomic bank lending. Second, I examine trade credit by dividing GTCs’ trading partners into related companies (i.e., subsidiaries and associate firms) and non-related companies. In terms of the reactions of trade credit to market financial indicators, I did not find statistically significant evidence that the Meltzer hypothesis works in either case. No matter with whom a GTC trades, interfirm financing passing through the GTC’s balance sheet moves positively in concert with banking financing. A major difference between related and non-related companies lies in the way in which trade receivables react to a GTC’s individual financial situation (that is, a firm’s individual interest expense rate minus a market’s interest rate). An increase in the interest gap induces a GTC to incur extra expenses over the market rate. In this situation, a GTC reduces trade receivables to non-related firms, but not those to related firms. This behavior eventually works as a shield, protecting their related companies from sharing the parent company’s interest costs.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17331.

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Date of creation: 16 Sep 2009
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Handle: RePEc:pra:mprapa:17331
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  1. Jeffrey H. Nilsen, 1999. "Trade Credit and the Bank Lending Channel," Working Papers 99.04, Swiss National Bank, Study Center Gerzensee.
  2. Valerie A. Ramey, 1991. "The Source of Fluctuations in Money: Evidence From Trade Credit," NBER Working Papers 3756, National Bureau of Economic Research, Inc.
  3. Simona Mateut & Alessandra Guariglia, . "Credit channel, trade credit channel, and inventory investment: evidence from a panel of UK firms," Discussion Papers 05/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  4. Rose Cunningham, 2004. "Trade Credit and Credit Rationing in Canadian Firms," Working Papers 04-49, Bank of Canada.
  5. Simona Mateut & Spiros Bougheas & Paul Mizen, . "Trade Credit, Bank Lending and Monetary Policy Transmission," Discussion Papers 05/01, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  6. Sheard, Paul, 1989. "The Japanese general trading company as an aspect of interfirm risk-sharing," Journal of the Japanese and International Economies, Elsevier, vol. 3(3), pages 308-322, September.
  7. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  8. Kenneth D. West & Whitney K. Newey, 1995. "Automatic Lag Selection in Covariance Matrix Estimation," NBER Technical Working Papers 0144, National Bureau of Economic Research, Inc.
  9. J. Lloyd Blackwell, III, 2005. "Estimation and testing of fixed-effect panel-data systems," Stata Journal, StataCorp LP, vol. 5(2), pages 202-207, June.
  10. Oliner, Stephen D & Rudebusch, Glenn D, 1996. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Comment," American Economic Review, American Economic Association, vol. 86(1), pages 300-309, March.
  11. Ono, Masanori, 2001. "Determinants of Trade Credit in the Japanese Manufacturing Sector," Journal of the Japanese and International Economies, Elsevier, vol. 15(2), pages 160-177, June.
  12. Laura Rondi & Brian Sack & Fabio Schiantarelli & Alessandro Sembenelli, 1998. "Firms' Financial and Real Responses to Monetary Tightening: Evidence for Large and Small Italian Companies," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 57(1), pages 35-64, April.
  13. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  14. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 33-60, February.
  15. Giuseppe Marotta, 1997. "Does trade credit redistribution thwart monetary policy? Evidence from Italy," Applied Economics, Taylor & Francis Journals, vol. 29(12), pages 1619-1629.
  16. Yungsan Kim & Woon Gyu Choi, 2003. "Trade Credit and the Effect of Macro-Financial Shocks; Evidence From U.S. Panel Data," IMF Working Papers 03/127, International Monetary Fund.
  17. Cunningham, Rose, 2005. "Trade Credit and Credit Rationing in Canadian Firms," Economic Analysis (EA) Research Paper Series 2005036e, Statistics Canada, Analytical Studies Branch.
  18. Takeo Hoshi & Anil K. Kashyap, 2004. "Japan's Financial Crisis and Economic Stagnation," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 3-26, Winter.
  19. Marion Kohler & Erik Britton & Tony Yates, 2000. "Trade credit and the monetary transmission mechanism," Bank of England working papers 115, Bank of England.
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