Do Japanese Banks Change Their Lending Behavior to Dull Industries? A Comparison with the Bubble Period

ABSTRACT This paper investigates whether Japanese banks have improved their lending behavior to the real estate industry, construction industry, and distributor-retailers, all of which it is believed have been recipients of additional lending even after the collapse of the bubble (known as "OIGASHI" in Japanese). Specifically, the relationship between the increase in the lending balances to those industries in the second half of the 1980s and the increase in the beginning of the 1990s is analyzed. Also, the relationship between the increase in the lending balances in the second half of the 1980s and the increase in recent years is examined. This paper finds that banks that actively lent to those industries during the bubble period were likely to continue financing those industries aggressively in the period after the collapse of the bubble, and that these same banks began to improve their lending behavior more recently. JEL Classification: G21 Keywords: OIGASHI; Lending behavior; Real estate industry; Construction industry; Distributor-retailers; Bubble period; Management reforms of Japanese banks I. INTRODUCTION Japanese banks must undergo drastic reforms in their management in order to solve several problems that were produced in the bubble period. Specifically, they have to dispose of bad loans and downsize in earnest. We would like to approach the question of whether they are actively working to resolve those problems. First, many banks have restructured by cutting back on salaries, bonuses, and the number of executives and tellers (though whether the proper level of cuts has been made remains unknown). With regard to the restructuring of capital equipment, it has been demonstrated in previous studies that banks have reduced their branches in order to correct decisions they made during the bubble period (e.g., Yamori and Kondo (2002)). Regarding the disposal of bad loans, four mega banks have attained their objective of decreasing the amount of bad loans by over half of the existing bad loans (1). While the disposal of bad loans has reached these target levels due to the government initiatives in recent years, most banks hesitated to dispose of bad loans until a few years ago. Making additional loans to a particular industry or a company even though a previous loan is impossible to collect or highly unlikely to be collected is called "OIGASHI" in Japanese. It is widely believed that many banks postponed the disposal of bad loans by means of OIGASHI. In particular, previous studies have shown that it is widely believed that after the bubble period ended, many banks made additional loans to the real estate industry and construction industry, which were star industries in the bubble period but have slumped since the collapse of the bubble (e.g., Sasaki (2000), Sakuragawa (2002), Sugihara and Fueda (2002)) (2). The purpose of this paper is to clarify whether Japanese banks' lending behavior to the real estate industry, construction industry and distributor-retailers, which was believed to feature "OIGASHI" after the collapse of the bubble, has improved in recent years. In addition, this analysis will provide evidence on whether Japanese banks have reformed their management aggressively. The remainder of this paper is organized as follows. In section II, the data and methodologies employed in this paper are explained. In section III, the empirical results are shown and the relationship between the lending behavior in the bubble period and that in recent years is considered. The final section provides a summary and conclusions. II. Methodology and Data A. Methodology Kang and Stultz (2000), in a study of the Japanese stock market crash, proposed that if stock prices increased too much in the second half of the 1980s and the crash was a correction, then there should be a negative relationship between a firm's stock price increase in the second half of the 1980s and that in the 1990s. …