Who killed the Japanese money multiplier? A micro-data analysis of banks

This paper investigates causes of the recent sharp decline in the money multiplier in Japan from the bank side. Two candidates for the cause are examined: the first is the worsening of the banks’ financial soundness, and the second is the zero interest rate policy. Using panel data of banks’ balance sheets, it is shown that both can contribute to a decline in the responsiveness of loans to a base money expansion. Quantitatively, the low interest rate is the more important among the two