The Effectiveness of Public Credit Guarantees in the Japanese Loan Market

Uesugi, lichiro, Sakai, Koji, and Yamashiro, Guy M.-The Effectiveness of Public Credit Guarantees in the Japanese Loan Market This paper examines the effectiveness of public credit guarantee programs in not only increasing the availability of loans to small and medium enterprises (SMEs), but in also improving the ex-post performance of borrowing firms. Using a unique panel data set, we identify the effects of a massive credit guarantee program implemented by the Japanese government from 1998 to 2001. While we do find that the availability of loans increased for program participants, when loans were provided by undercapitalized banks the increased liquidity persisted for only a few years. Further, the ex-post performance of program participants, with the exception of firms with sizable net worth, deteriorated relative to their non-participating counterparts. J. Japanese Int. Economies 24 (4) (2010) 457-480. Research Institute of Economy. Trade and Industry, Japan; Department of Economics, Kyoto Sangyo University, japan; Department of Economics, California State University, Long Beach, United States. (C) 2010 Elsevier Inc. All rights reserved.