Japan: Selected Issues

Abstract

Japan: Selected Issues

QQEs Impact on Financing Conditions of Listed Firms1

Under Japan’s QQE I and II, the total debt of listed firms increased. But the increase was more pronounced for financially-unconstrained firms (as measured by their financial constraint index in March 2013) than for financially-constrained firms. Meanwhile, the total debt increased more for multinational firms than for domestic firms, due to the former’s international operations. This suggests that risk-taking by the financial sector remains incomplete, hampering the transmission of monetary easing.

A. Background

The Bank of Japan implemented the Quantitative and Qualitative Monetary Easing policy (QQE I) on April 4, 2013, and expanded it further on October 31, 2014 (QQE II). Aggregate bank lending has increased since QQE. But little analysis has been done to examine the distributional effects on non-financial firms, especially based on their pre-QQE financial conditions. We address this issue by examining 3058 listed non-financial firms in Japan from March 2013 to March 2015, and analyze how their borrowing has changed since QQE and how that change relates to their pre-QQE financial constraints.

B. Methodology and Results

We first construct a financial constraint index for each firm based on their financial fundamentals in March 2013. Following the approach of Kaplan and Zingales (1997), the financial index is measured as: -[cash flow to capital] + 0.28*[Tobin's Q] + 3.13*[debt to capital] -39.36*[dividends to capital] -1.31*[cash to capital]. A higher index is associated with greater financial constraints; i.e., the higher the extent to which firms depend on external sources of funds to finance investment. If the firm’s financial index is above (or below) the sample median, then it is classified as financially constrained (or unconstrained). Figure 1 plots the percentage change in total debt from March 2013 to March 2015 for the whole sample, for the financially constrained group, and for the financially unconstrained group respectively. Total debt increased for the whole sample, but the increase was mostly due to financially unconstrained firms, while much less so for financially constrained firms.

Figure 1.
Figure 1.

Change of Total Debt from 2013 to 2015 (%)

(by pre-QQE Financial Constraints)

Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A005

Source: Worldscope.

We next examine whether Japanese multinational firms and domestic firms have had different borrowing patterns since the QQEs. We first identify a firm as a multinational firm based on its ratio of foreign assets over total assets in March 2013. It will be classified as a multinational (or domestic) firm if that ratio was above (or below) the sample median. Figure 2 plots the percentage change of the total debt for multinational firms and for domestic firms respectively. Total debt increased significantly for multinational firms, but much less so for domestic firms. This is likely due to the higher demand of financing from multinational firms owing to their international growth opportunities.

Figure 2.
Figure 2.

Change of Total Debt from 2013 to 2015(%)

(by Domestic and multinational firms)

Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A005

Source: Worldscope.

C. Conclusion

The borrowing by Japanese non-financial firms has increased since QQE. But the increase was more pronounced for financially-unconstrained firms than for financially-constrained firms. Meanwhile, the total debt increased more for multinational firms than for domestic firms, likely reflecting the former’s international operations. This suggests that domestic risk-taking by the financial sector remains incomplete, hampering the transmission of monetary easing.

References

Kaplan, S. N. and L. Zingales, 1997, Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints? Quarterly Journal of Economics 112 (1): 169215.

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Prepared by Hui Tong (RES).

Japan: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept
  • View in gallery

    Change of Total Debt from 2013 to 2015 (%)

    (by pre-QQE Financial Constraints)

  • View in gallery

    Change of Total Debt from 2013 to 2015(%)

    (by Domestic and multinational firms)