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Directed Credit? The Loan Market in High-Growth Japan


  • Yoshiro Miwa,

  • J. Mark Ramseyer

  • The authors gratefully acknowledge the helpful comments and suggestions of John de Figueiredo, Michihiro Kandori, Takao Kobayashi, Tatsuya Kubokawa, Naoto Kunitomo, Akihiko Matsui, Toshihiro Matsumura, Tom Miles, Takashi Obinata, Yasuhiro Ohmori, Eric Rasmusen, Roberta Romano, Mark West, and the participants at workshops at Harvard University, University of Tokyo, and Vanderbilt University. Generous financial assistance was given by the Center for the International Research on the Japanese Economy and the Business Law Center at the University of Tokyo, the John M. Olin Program in Law, Economics & Business at the Harvard Law School, and the Sloan Foundation.


Observers routinely claim that the Japanese government of the high-growth 1960s and 1970s rationed and ultimately directed credit. It barred domestic competitors to banks, insulated the domestic capital market from international competitive pressure, and capped loan interest rates. In the resulting credit shortage, it promoted industrial policy by rationing credit.

As much as the government purported to ration and to direct credit, it apparently accomplished nothing of the sort. It did not block domestic rivals to banks successfully, did not insulate the market from international forces, and did not set maximum interest rates that bound. Using evidence on loans to all 1,000-odd firms listed on Section 1 of the Tokyo Stock Exchange from 1968 to 1982, we find that observed interest rates reflected borrower risk and mortgageable assets and that banks did not use low-interest deposits to circumvent any interest caps. Instead, the loan market seems to have cleared at the nominal rates.

We follow our empirical inquiry with a case study of the industry to which the government tried hardest to direct credit: ocean shipping. We find no evidence of credit rationing. Despite the government programs to allocate capital, nonconformist firms funded their projects readily outside authorized avenues. Indeed, they funded them so readily that the nonconformists grew with spectacular speed and earned their investors enormous returns.