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The Effect of Bank Credit on Asset Prices: Evidence from the Japanese Real Estate Boom during the 1980s


  • I am indebted to David Weinstein and Hugh Patrick for giving me the opportunity to be a visiting scholar at the Center on Japanese Economy and Business (CJEB) at Columbia Business School during the summer of 2004 and for many helpful conversations. I would like to acknowledge David Weinstein for providing me with access to the Development Bank of Japan Corporate Finance Data Set and the CJEB for providing me with access to the Nikkei NEEDS database. I thank Takeo Hoshi for sharing his data and for his initial encouragement to pursue this topic. I also benefited from comments from Ricardo Caballero, Roberto Rigobón, James Vickery, Sujit Kapadia, Deborah Lucas (the Editor), an anonymous referee, participants at the MIT International Workshop, the 22nd Symposium on Banking and Monetary Economics in Strasbourg, and the 18th Australasian Finance and Banking Conference in Sydney.


This paper studies whether bank credit fuels asset prices. Financial deregulation during the 1980s allowed keiretsus to obtain finance publicly and reduce their dependence on banks. Banks that lost these blue-chip customers increased their property lending, and serve as an instrument for the supply of real estate loans. Using this instrument, I find that a 0.01 increase in a prefecture's real estate loans as a share of total loans causes 14–20% higher land inflation compared with other prefectures over the 1981–91 period. The timing of losses of keiretsu customers also coincides with subsequent land inflation in a prefecture.