The Bright Side of Lending by Government Owned Banks: Evidence from the Financial Crisis in Japan

This paper investigates the effect of lending by government owned banks on real investment and employment for publicly traded industrial firms in Japan, focusing on a period that covers the financial crisis in the 1990s caused by the burst of the real estate bubble. We find that increases in government owned bank lending has strong impact on investment during the crisis. In contrast, increases in government owned bank lending has little effect on employment growth. The positive effects of increases in government owned bank lending are focused on non-zombie firms. Firms that are more credit constrained show larger increases in investment with increases in government owned bank lending. Thus, our results show that government owned bank interventions can be effective in mitigating credit constraints and stimulating investment even for publicly traded companies.