Public Policy on SME Finance in Japan : Credit Guarantee and Local Government Loan

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The purpose of this project is to study empirically impacts of the credit guarantee scheme and the local government loans ( Seido-Yushi) on SME loan markets in Japan. Firstly we formulate an analytical framework by using the two dimensional asymmetric information model based on Hillier's model. The theoretical investigation shows that the guarantee fee rate and the default loss covering ratio of credit guarantee corporations play important roles in determining the equilibrium credit allocation in loan markets. It also shows that government can improve the inefficiency of credit allocation by arranging these policy instruments through subsidies to the credit guarantee corporations. Secondly, we estimate credit guarantee functions of the credit guarantee corporation and SME loan functions of financial institutions by panel analysis of prefecture data. Finally we gathered basic statistical data on Seido-Yushi through survey of policy departments in charge of the Seido-Yushi of each local government. Then we estimate the policy reaction function of the local government in SME loan markets.