Credit Crunch: A Lesson from the Japanese Case

The purpose of this paper is to elucidate whether the supply side played a crucial role in causing the credit crunch in Japan in the 1990s. To this end, we estimate the supply and demand functions using prefectural panel data from 1990 to 2001 and calculate the shifts of those functions. The results reveal that until 1996 the supply side was not the main cause of stagnant loans, and after 1996 the contraction of the supply side at best contributed as much as the demand side to the decrease in loans. Thus, the countermeasures on the banking sector were not adequate to increase the loans.