1997 Reports

Credit channels and the small firm sector in Japan

Kuwayama, Patricia H.

This study looked for evidence of a "credit channel", amplifying monetary impulses transmitted to the real economy via small manufacturing firms in Japan. It was inspired by several studies that found evidence of such a "financial accelerator" in the United States. The results are largely negative, however: There do not appear to be systematic differences in the cyclical response of small, as compared to large, firms to monetary tightening in Japan. This leads to a look at differing characteristics of the small-firm sector in the two countries: Specifically, one of the main reasons for believing that small firms are credit-constrained is that they tend to be relatively young firms, lacking a track record that helps to overcome informational asymmetries and to lower the cost of external finance. But, there is some evidence suggesting that the strong correlation between age and size of firm may not apply in Japan, which has startlingly low firm turnover rates compared to other industrial countries. The implication is that, while a credit channel may well exist in Japan, it cannot be identified by using firm size as a proxy for credit access; more direct measures need to be employed, probably using cross-sectional data. An appendix to this paper is devoted to data issues relating to the Ministry of Finance's quarterly survey of corporations, including problems with the size classification based on paid-in capital. These data problems, while important, do not explain away the lack of evidence for a "credit channel" through small firms.