Facilitation of Funds and Small Business Failures (in Japanese)

This paper investigates the effectiveness of policies, especially credit guarantees and governmental institution lending, to facilitate funding for small and medium enterprises (SMEs) in Japan in the late 1990s. We set up a panel from different Japanese prefectures from 1993 to 2001 to estimate a system of equations of i) lending to SMEs, ii) credit guarantees outstanding, and iii) payments under guarantee (or business failures) by error components 3SLS. We found Japanese SMEs to be excessively indebted to pay back their borrowings from their earnings. Estimated coefficients of the system of equations suggest that, despite their high social costs, fund supply facilitation policies did nothing but delay the timing of small business failures. SME problems in Japan cannot be dissolved by temporary credits. We would argue that what are really needed to resolve the difficulties of small firms are measures to help reorganizing heavily indebted firm, not measures to promote unprofitable lending.