A DISEQUILIBRIUM ANALYSIS OF THE BANK LOAN MARKET IN JAPAN

Abstract

The purpose of this paper is to present a simple model of the Japanese bank loan market and to estimate the degree of rationing in supply and demand adjustment for commercial bank loans. It has been discussed that the existence of credit rationing, especially“dynamic rationing”is a wide-spread phenomenon in the Japanese financial market because of the institutional rigidity of loan rates. In order to deal with such a situation empirically, Fair=Jaffee [7] and others applied disequilibrium methods.
However, so far there has been found little empirical effort in this field trying to explain the existence of credit rationing in the Japanese financial market on the basis of new disequilibrium approach until the work of Hamada et al. [3] appeared. Their method is based on the work of Fair=Jaffee with special emphasis on a very close relationship between the discount rate and the bank loan rates. And they assert that their study suggests the existence of credit rationing. However, the empirical results given by them are not persuasive enough. We employ a model that is basically similar to theirs, but that has a few differences in the following aspects: (i) We made alternative assumptions on price (loan rate) adjustment mechanism. (ii)“the Quantitative Method”as well as“the Direction Method I” was tested. (iii) A number of various alternative specifications were tested in estimating the price adjustment equations in which the discount rate influences the loan rates.
Our empirical results suggest that, for the period we studied, the bank loan market could be interpreted to have been in equilibrium, and that non-price rationing has not been a significant factor, even though the estimated long adjustment speed in loan rate adjustment exist. This tentative conclusion shows a sharp contrast with a widely-accepted view that credit rationing is quite prevalent in Japanese financial markets.