Bank Lending Channel in Transmission of Monetary Policy in Japan, 2000–2012: The Sign Restrictions VAR Approach

This paper investigates empirically whether the bank lending channel of monetary policy existed in Japan from 2000 to 2012. We employ the sign restrictions VAR approach to deal with the identification problem. In particular, we focus on the differential effects of a quantitative easing monetary policy regardless of bank (City banks vs. Regional banks) and firm (all enterprises vs. small and medium-sized enterprises－SMEs) size. Our impulse response function analyses show that following a quantitative easing monetary policy shock, the lending of Regional banks increases more than that of City banks, and the bank lending rate of Regional banks declines in a larger magnitude. Moreover, the responses of output to reserve supply are larger in Regional banks than that in City banks. Our variance decomposition analyses show that a larger proportion of the forecast error variance in the bank lending of Regional banks relative to City banks, and a larger proportion of the forecast error variance in the bank lending to SMEs relative to all firms can be explained by monetary policy shock. Similarly, the loans of Regional banks have a larger impact on output than the loans of City banks, and the loans to SMEs have a larger impact on output than the loans to all firms. Moreover, output is more affected by the reserve supply to Regional banks than to City banks. These results together indicate that a quantitative easing policy has a greater impact on the real economy through the lending of Regional banks.