We investigate whether and how the credit crunch during the financial crisis in Japan affected household welfare. We estimate the consumption Euler equation with endogenous credit constraints using household panel data for 1993–99, generating several findings. First, a small but nonnegligible portion of the households faced credit constraints during the crisis, rejecting the standard consumption Euler equation. Second, the credit crunch affected household welfare negatively, albeit not seriously. The estimated welfare loss ranges between 2% to 10% increases in marginal utility, depending on income level. Finally, our results corroborate that the credit crunch in Japan was supply-driven.