Debt disorganization in Japan [An article from: Japan & The World Economy]

This digital document is a journal article from Japan & The World Economy, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
Business transactions shrank in the early 1990s in Japan, and banks rolled over significant amounts of non-performing loans to keep non-viable firms afloat. Why did firms became inactive even though banks continued providing loans? In order to solve this problem, we focus on the nature of debt contracts as a commitment device. By rolling over bad loans, the banks might have destroyed (unintentionally) the trustworthiness of the commitments of the debtors, thereby breeding distrust among firms. The rise of distrust could then have disorganized chains of productions. We conducted an empirical analysis to check this hypothesis. Our empirical results are supportive of this line of thinking, suggesting that the Japanese economy might have suffered from disorganization due to the rollover of bad debts.