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Over the period 1961-1991, the Bank of Japan (BOJ) attempted to directly control the volume of commercial bank credit by providing lending targets for selected banks. This policy of "window guidance " (WG) applied to only a subset of lending institutions. The guided banks involved were under no legal obligation to heed the BOJs requests. Using actual WG data to city banks, two questions are addressed. First, did city banks comply with WG (the "compliance hypothesis')? Second, was WG successful in controlling economywide lending or did lending adjustments by other financial institutions simply displace the lending of guided banks (the "displacement hypothesis")? The empirical results show a high degree of compliance in the first two decades of the program and evidence of weakening in the final years. The displacement hypothesis is rejected, particularly in the early period of highly regulated financial markets. (JEL E58, E51, E52)
ABBREVIATIONS
AFI: All Financial Institutions
BOJ: Bank of Japan
CB: City Banks
D.W.: Durbin-Watson Statistic
L: Total Loans and Discounts
L*: City Bank Loan Guidance
OB: Other Banks
PL: Urban Price of Land
R^sub B^: Industrial Bond Rate
R^sub CALL^: Overnight Call Rate
R^sub D^: Deposit Rate
R^sub DISC^ Discount Rate
R^sub L6: Effective Loan Rate
W: National Wealth
W^sub C^: Corporate Net Worth
WG: Window Guidance
Y: Gross National Product
y: Reserve Requirement Ratio
I. INTRODUCTION
Among the pillars supporting Japan's rapid postwar rise to economic prominence was a financial system based overwhelmingly on private and public loans. The widespread perception that this system of "indirect finance" no longer works is the driving force behind the "Big Bang" financial reforms of the Japanese government. Recent financial difficulties in Japan (and Asia generally) have shifted the focus of academic attention from the study of industrial policies to the mechanisms of financial regulation. This paper examines an important and neglected area of Japan's financial policy, the attempt to directly control the lending of commercial banks and other financial institutions. Since loan volume was the Bank of Japan's (BOJ) intermediate target for most of the postwar period, window guidance (WG; mado guchi shido was potentially an important monetary policy instrument.
WG refers to the BOJ's maximum loan growth target for selected banking institutions, particularly city banks (large commercial banks...