The International Transmission of Financial Shocks: The Case of Japan

Abstract

One of the more dramatic financial events of the late 1980s and early 1990s was the surge in Japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent. While the unprecedented fluctuations in Japanese stock prices were domestic financial shocks, the unique institutional characteristics of the Japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the Japanese banking system. The large size of Japanese bank lending operations in the United States enables us to use U.S. banking data to investigate the extent to which this domestic Japanese financial shock was transmitted to the United States, as well as to identify a supply shock to U.S. bank lending that is independent of U.S. loan demand. We find that binding risk-based capital requirements associated with the decline in the Japanese stock market resulted in a decline in commercial lending by Japanese banks in the United States that was both economically and statistically significant. This finding has added importance given the severe real estate loan problems currently faced by Japanese banks. How Japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the United States as well as in other countries with a significant Japanese bank presence.

Systemic Banking Crises Database

“…The rationale for this alternative definition is straightforward. Banking crises disrupt the supply of credit (Bernanke andGertler, 1987, Van Den Heuvel, 2006, Valencia, forthcoming, andothers) and these disruptions to the supply of credit can have important real effects because some borrowers cannot substitute bank loans with alternative funding sources (Peek and Rosengren, 1997;Ashcraft, 2005;Laeven and Valencia, 2013, and others). In essence, by looking at declines in credit growth in conjunction with negative GDP growth, we look for evidence of the two main implications of banking crises.…”

Capital Flow Waves: Surges, Stops, Flight, and Retrenchment

“…The various transmission mechanisms for contagion can be broadly broken into contagion through trade channels (which include direct trade, competition in third markets, and changes in import prices), financial channels (including through bank lending and portfolio flows), and "country similarities" (such as a shared regional location or similar economic characteristics). Glick and Rose (1999), Forbes (2002), and Abeysinghe and Forbes (2005) focus on contagion through trade, while Peek and Rosengreen (1997), Kaminsky, Lyons, and Schmukler (2001), and Broner, Gelos, and Reinhart (2006) focus on the role of financial linkages. Van Rijckeghem and…”

Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit

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