Balance sheet deterioration and credit allocations: Japanese evidence from the short-term economic survey of enterprises

This study is an empirical attempt to investigate the effects of balance sheet deterioration of Japanese firms and banks in the 1990s on credit allocation using the short-term economic survey of enterprises. This survey contains a unique item: proportion of firms perceiving the lending attitude as severe. After developing a theoretical model to link this item with the balance sheet conditions of borrowers and lenders, we estimate the relationship derived from the model. We find that credit was reduced when the balance sheet of firms and banks deteriorated. The effects are notably large for non-manufacturing industries. 2010 Elsevier B.V. All rights reserved. § An earlier version of this paper was presented as an invited lecture at the 2005 Spring Meeting of the Japan Economic Association held at Kyoto Sangyo University in June 4 and 5, 2005. The author is grateful to Masaya Sakuragawa, Ichiro Tokutsu and an anonymous referee for extremely valuable comments and suggestions on an earlier version of the paper. This research was partially supported by Grants-in-Aid for Scientific Research 19330044 of the Ministry of Education. Any remaining errors are the sole responsibility of the author. * Tel.: +81 6 6879 8570; fax: +81 6 6878 2766. E-mail address: [email protected].