Relationship Banking in Post-Bubble Japan: Coexistence of Soft-and Hard-Budget Constraints 1

This chapter examines the changes in the Japanese main banking system. Despite the deregulation of bond markets in the mid-1990s, the overall dependence of firms on bank borrowing increased rather than decreased among listed firms during the 1990s. Large firms lessened their ties with banks and began financing through bonds, yet smaller listed firms continued borrowing from banks. In particular, firms with previously high levels of bank debt relied on their main bank for an increasing proportion of those loans. By estimating the employment adjustment function, the chapter shows that the main banks did not effectively discipline corporate restructuring, although banks encouraged the restructuring of firms with a relatively better performance. As Japan recovers from the banking crisis, main bank relationships are likely to survive among a segment of smaller and less internationalized Japanese firms.