Some Evidence on the Link between Bank Health and Regional Economies(in Japanese)

Masahiro Hori and Hideaki Kitaki

ESRI Discussion paper series from Economic and Social Research Institute (ESRI)

Abstract: It is widely accepted that financial problems-symbolized by the accumulating non-performing loans and bank failures-are the main cause of Japan's stagnation throughout the 1990s. However, few of those arguments are empirically substantiated, and few economists who emphasized the importance of financial problems even attempted to quantify the degree to which they are acting as a drag on the economy. Based on the belief that the malfunctioning of the financial sector is causing problems in Japan, several hypotheses are proposed to explain the long stagnation. Among those, this paper specifically focuses on three hypothetical channels that emphasize the role of information asymmetry in financial intermediation: (1) Increasing non-performing loans eroded the capital base of the banks. (2) Main bank failure caused loss of accumulated information on client firms. (3) Collateral value declined because of asset deflation. These channels respectively caused the hike of agency costs in financial intermediation, and are believed to have impaired Japan's economic performance through a credit crunch. To see the validity of the hypotheses, the paper examines the correlation between the health of the regional banks and the general performance of regional economies. Comparative analyses of prefectural data and regression analyses of the changes in firms' investments show that there is neither strong correlation between the prefectural economic performance and the health of regional banks, nor significant difference between investments of large firms and those of small firms. We think these findings cast a doubt on the validity of the three hypotheses above.

Pages: 40 pages
Date: 2003-05
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