Does the Policy Lending of the Government Financial Institution Mitigate the Credit Crunch? Evidence from the Loan Level Data in Japan

Using the data of individual loan contracts extended by the government owned Japan Finance Corporation for Small and Medium Enterprise (JASME), we examine whether the JASME's lending from December 1997 thorough March 1999 mitigated the credit crunch. We find that on average the JASME offset more than a quarter of reduction in lending by a firm's main bank due to poor capital adequacy. We further find that the effect of JASME's loans on a firm's performance is negative in a few years after loans are made but this negative effect dissipates afterward