Regulation Policy And Credit Crunch: Evidence From Japan

This paper aims to answer the following question: what is (are) the cause(s) of the severe reduction in bank credits in Japan between 1999 and 2005? The answer to this question becomes very interesting if we know that during the above mentioned period an ultra–expansionary monetary policy has been implemented by the Bank of Japan. A theoretical lending–supply model is built. The methodological contribution of this work stands on the test of three credit crunch–hypotheses, all together. The estimation results show that during the period of study a credit crunch was, indeed, taking place and it is attributed to bankers’ precautionary behavior rather than direct regulatory capital worries. The strengthening of the regulatory environment started in 1998 can explain the conservative lending behavior of Japanese banks during the period of study.