"Credit Guarantee" Policy [shin'yo hosho seido] for Small Businesses in Japan, with Reference to "the Special Credit Guarantee Policy" during 1998.10 - 2001.3

The Japanese government, in collaboration with local governments, guarantees the credit of small businesses. During the last decade, it spent annually an average of 2 billion US dollars under these programs. In addition, during the last stage of the Japan's "financial crisis" (Oct. 1998-Mar. 2001), it spent another 20 billion dollars for "the Special Credit Guarantee Policy." The "credit guarantee" policy began in 1937 as a policy of the Tokyo metropolitan government, and expanded into a national program during the 1950s. During the 1990s recession, it expanded further, and became a central part of the government's small business policies. This paper investigates three questions. First, what is the raison d'etre, necessity, and importance of the policy? Second, how effectively and efficiently has it achieved its apparent objective? Third, how appropriate is the policy actually adopted? I find that the credit guarantee policies are unnecessary, distort resource allocation, and slow market mechanisms. The policies promise 100% "credit guarantee" at approximately 1% annually of the loan volume. In pouring huge amount of money into the program, however, the government creates a wide variety of undesirable side effects. I add suggestive answers to the questions of "why the policy has survived so long? ", "why has it expanded so heavily?", "who supported it?", and "who benefits from it?"