A Theoretical and Empirical Study on Structural Change in Flow-of-Funds of the Japanese Economy in the 1990s

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We investigated the structural change in flow of-funds of the Japanese economy during the 1990s from the following three viewpoints: bank behavior, firm behavior and bank-firm relationship. We summarize our main findings of our research.1. Bank BehaviorFirst, we investigated the determinants of banks' excess reserves under the quantity easing policy adopted in the period of March in 2001 to March in 2006. We estimated the demand function for excess reserves by commercial banks derived from expected profit maximization by banks, using bank panel data set. We found that banks held excess reserves due to fragile financial system and almost zero interest rate situations. Secondly, we investigated the determinants of lending attitude of financial institutions reported in the BOJ Tankan survey. Estimation was conducted separately by firm size and industry. In particular we were interested in the impact of deteriorating balance sheet of banks on lending attitude of banks. We found that mounti … More ng non-performing loans in the banking sector led to severity of lending attitude of financial institutions.2. Firm BehaviorFirst, it should be noted that external finance premium for the firm crucially hinges upon the degree of asymmetric information between lenders and borrowers or agency cost. The external finance premium is intrinsically unobservable, but we made an attempt to estimate it by using Bayesian statistical tools. We found that the agency cost was lowered in the bubble period and then it increased rapidly after the bubble collapse. We also found that business investment was closely related to the movement of agency cost. Second, we investigated what kind of information business investment responds to when the firm adjusts its investment plans. In particular we examined whether investment revision is sensitive to evaluation in stock market. We found that revision of business investment is sensitive to revision of sales and profits rather than stock market events.3. Bank-Firm RelationshipIn Japan it is often argued that information of the firm is concentrated on one bank or its main bank. Although information of the firm is concentrated on its main bank, the firm has in many cases multiple bank-firm relationships. We investigated why the firm has multiple relations with banks based on micro-data of large listed firms and small unlisted firms. We found that balance sheet conditions of the main bank as well as its affiliated firms affected the number of bank relations. Less