Firm Heterogeneity and the Dynamics of Credit Rationing in Japan

Abstract

The role of firms' financial heterogeneity in determining the credit channel of monetary policy attracted more attention recently. We investigate the degree of financial constraints among listed Japanese firms from 1994 to 2014. Based on an estimated financial constraints index, we analyze the distribution of this value and investigate its time-series changes. First, the distribution of financial constraints is approximately a gamma distribution with a long right tail, meaning that many firms have weak credit constraints and a small number of firms have severe credit constraints. Second, the spread between the 75th and the 25th percentiles of the financial constraints index increased, especially after 2000, which implies that financial inequality increased recently. Third, this increased inequality may be due to the growing inequality between firms within the same industry. We conduct a simple regression of the financial constraints index on productivity and find that the increased financial heterogeneity appears to be linked to the increase in productivity dispersion.