Sectoral Credit Shifts in Japan: Causes and Consequences of Their Decline in the 1990s

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In this paper, we construct a simple measure of sectoral credit shifts, defined as the dispersion of growth rates of bank loans across sectors, and investigate what effects they had on Japan's economy and what accounted for their development. We find that (i) during the 1990s, the amount of sectoral credit shifts declined significantly, which was responsible for - in conjunction with effects from falls in land prices and aggregate outstanding loans - the stagnated real growth; and (ii) the decline in the credit shifts in the 1990s reflected weakened financial intermediation rather than a decrease in the size of sectoral shocks. These results are consistent with the view that financial intermediation was weakened by the exacerbated non-performing loan problems after the collapse of the asset price bubble, and thus prevented credits from shifting to relatively efficient sectors.

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