An analysis of aggregate lending in Japan

Aggregate bank lending has stagnated since 1990 in Japan. This observation has generated a debate on whether the supply side of the credit market had an effect on the economy in its recent slowdown. At this point, the evidence is ambiguous. The hypothesis is primarily challenged by the low level of interest rates. However, in this paper we analyse indicators that also point towards a credit crunch explanation: the development of commercial paper, as a substitute for bank lending, and survey data on the firms' evaluation of the lending attitude of banks. We find that while aggregate lending has stagnated, there was a continued high demand for commercial paper. Using the Short-term Economic Survey of Enterprises in Japan (Tankan), we also document that small firms felt more credit constrained than larger firms until recently in Japan. This difference has been reduced, and has lost statistical significance, however, in the recent recovery since 2003. Finally, we point out that there exists a striking similarity between the recent developments in Germany and Japan in the 1990ies.