Financial Shocks and Japan's Export Collapse during the Global Financial Crisis: Evidence from Bank-firm Matched Data

To elucidate the relationship between the great trade collapse of 2008-09 and financial shocks, existing literature has focused on the channel of trade credit. Because exporting activities are more working-capital dependent than domestic sales, firms may reduce their exports when their banks' ability to provide trade credit deteriorates due to financial shocks. Based on the above-mentioned hypothesis, this paper aims to investigate whether adverse shocks to banks explain Japan's export collapse during the crisis. To this end, I construct bank-firm matched data by utilizing the Basic Survey of Japanese Business Structure and Activities conducted by the Ministry of Economy, Trade, and Industry. The panel data analyses of this paper, in which firm-, year-, destination-, and industry-fixed effects are fully controlled for, demonstrate that the growth rate of exports was significantly lower for firms with unhealthy banks, and this tendency was strengthened during the crisis. However, it also comes to light that exports by financially affected firms account for only a small part of Japan's total exports, and the industry- and destination-common-effects explain the large parts of the decline. Putting the empirical results of this paper together, the existence of a trade credit channel is empirically supported, but its impact was quantitatively minor in explaining Japan's export collapse.