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The Role of Trade Credit for Small Firms: An Implication from Japan's Banking Crisis

October 2006
Shin-ichi Fukuda*1
Munehisa Kasuya*2
Kentaro Akashi*3

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Abstract

Trade credit is one of the most important sources of short-term external finance for small firms. Previous literature has focused mainly on the substitution of bank loans for trade credit during monetary tightening among many firms, but in this paper we investigate the role of trade credit during the banking crisis in Japan. The basic motivation is to explore whether the substitution hypothesis still holds even under serious financial turbulence. Our main results suggest that the substitution hypothesis held in Japan when the banking sector was healthy, but broke down during the banking crisis. More precisely, both bank loans and trade credit contracted simultaneously during the crisis. Deteriorated bank health might have been primarily responsible for the widespread declines of credit to small and medium size firms in Japan during the banking crisis.

Key words:
Trade credit, Bank-firm relationship, Unlisted firms

JEL #: G21, G33,.G32

An earlier version of this paper was presented at the JAE conference held at Hitotsubashi University on September 15 and 16. We would like to thank I. Uesugi and the other conference participants as well as the staff of the Bank of Japan (Research and Statistics Department) for their helpful comments. Views expressed in this paper are those of authors and do not necessarily reflect those of the Bank of Japan or its Research and Statistics Department.

  • *1 University of Tokyo
    E-mail: sfukuda@e.u-tokyo.ac.jp
  • *2 Research and Statistics Department
    E-mail: munehisa.kasuya@boj.or.jp
  • *3 University of Tokyo

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