Small Business Credit Scoring: Evidence from Japan

This paper studies the Japanese credit scoring market using data on 2,000 SMEs and a small business credit scoring model widely used in the market. After constructing a model for determining a bank's profit maximization, we find the optimum loan sizes and profit levels, and point out some lending pitfalls based on small business credit scoring. We show that solving the problems of adverse selection and window dressing are the most important things to do to increase the profitability of SBCS lending. In addition, omitted variable bias and transparency of financial statements are also important.

Simulation Analysis of the Revision of the Survivors' Pension System (Japanese)

In this paper we discuss the impact of potential proposed revisions to the survivors' pension system on the stability of pension finance and on intergenerational and intragenerational equitability. The three proposals we study are: (1) the proposal that the survivors' pension benefit be reduced to approximately 50% of the husband's benefit, as in Europe, (2) the proposal that the pension benefit received by a husband-wife household be revised to the income-averaging method in which the contributions of spouses are averaged over the duration of the marriage in calculating the amount of pension benefits of the spouses, and (3) the proposal, modelled on the Swedish method, that survivor benefits be separated from the Employees' Pension Insurance system, the funding based on general tax revenue, and employee pensions netted off by the amount of the survivors' benefits, based on the insurance principle. Our conclusions are as follows. First, so long as the current public pension system is built on the Basic Pension System which apportions benefits to every pensioner, it will not be possible to consider reducing the period of application of the macroeconomic slide system, as that would lead to the destruction of the National Pension System. In view of this, if these revision proposals were implemented it would be appropriate to alleviate the burden of Employees' Pension Insurance premiums. An incidental effect of this would be that the amount of the reserves of the public pension system, which are forecast to accumulate astronomically under the present finite balance system, could be reduced to some degree. This could be expected to have the effect of alleviating or avoiding the risk arising from fluctuations in investment returns. In addition, with regard to the internal rate of return (IRR) of employee pensions, we examine the impact of each of the revision proposals on different generations within and between types of household. The implementation of each of the proposals would give rise to the existence of vested pensioners who suffer declines in IRR, particularly in the model households for the middle-aged and elderly generations, though many households, in the young generation in particular, would benefit from a lower insurance premium burden. Combined with the fact that under the finite balance system it will primarily be the young generation that benefits from the run-down of the reserves left by the middle-aged and elderly generations, the generation gap can be expected to narrow somewhat. We also confirm that, as would be expected, the reduction and separation of the survivors' pension benefit generally reduces the gap between the model households and the other types of household.

Differentiated Use of Small Business Credit Scoring by Relationship Lenders and Transactional Lenders: Evidence from firm-bank matched data in Japan

This paper examines the ex-post performance of small and medium-sized enterprises (SMEs) that obtained small business credit scoring (SBCS) loans. Using a unique Japanese firm-bank matched dataset, we identify whether an SME has obtained an SBCS loan and, if so, from which type of bank: a relationship lender or a transactional lender. We find that the ex-post probability of default after the SBCS loan was provided significantly increased for SMEs that obtained an SBCS loan from a transactional lender. We also find that the lending attitude of relationship lenders in the midst of the recent global financial crisis became much more severe if a transactional lender had extended an SBCS loan to a firm. These findings suggest that SBCS loans by a transactional lender are detrimental to a relationship lender's incentive to monitor SMEs and maintain relationships. In contrast, we do not find such detrimental effects for SBCS loans extended by a relationship lender.

A Bayesian Estimation of HANK models with Continuous Time Approach:Comparison between US and Japan

Abstract This paper estimates heterogeneous agent New Keynesian (HANK) model for US and Japan through three aggregate observations: real GDP, inflation and interest rate, by adopting combination of easy-to-use computational method for solving the model, developed by Ahn, Kaplan, Moll, Winberry and Wolf (2019), and sequential Monte Carlo (SMC) method with Kalman filter applied for Bayesian estimation with parallel computing. The combination make us enjoy the estimation of HANK just using a Laptop PC, e.g., Mac Book Pro, with MATLAB, neither many-core server computer nor FORTRUN language. We show estimation results of one Asset HANK model, i.e., impulse response, fluctuations of distributions of heterogeneous agent as well as historical decomposition for both countries. Even though using the same model, different data draws different pictures

Impact of Greater Longevity on Pension Financing (Japanese)

Although greater longevity is coupled with a lower birthrate as one of the major causes of Japan's aging population, when it comes to factors influencing pension financing, longevity has not attracted as much attention as the birthrate. This paper quantitatively evaluates the impact of greater longevity on pension financing and examines the extent to which improvements can be expected in the sustainability of pension financing, by raising the eligibility age, using Population Projections for Japan: 2001-2050 with multiple assumptions for a longer life-span. Raising the eligibility age will improve pension financing quite considerably but this is an issue that needs to be debated in the future. At the same time, however, Japan should develop an infrastructure for social security systems and the labor market that will enable older workers to maintain their vigor as they work. This paper also conducts a simulation analysis of pension financing by concomitantly using the pension actuarial model and the life-cycle general equilibrium model so that the effects of changes in the population structure, through longer life-spans on the macro economy, can be taken into account. By using the pension actuarial model and the life-cycle general equilibrium model together, it will be possible to examine economic assumptions used in pension financing estimates, while consistently factoring in the impact of greater longevity on wage and interest rates from the standpoint of the life-cycle hypothesis. As estimates of pension financing cover extremely long periods of 100 years or so, it is necessary to pay greater attention to factors such as the aging population and life-cycle, which can cause dynamic fluctuations at the macro level. Pension estimates produced by the Ministry of Health, Labour and Welfare use fixed economic assumptions and regardless of which population assumptions are used, the research results in this paper indicate the possibility that in time, assumptions may lose their accuracy.

Source of the Great Recession

We incorporate two structural shocks associated with balance sheets of both the financial and nonfinancial firms in a medium scale New Keynesian dynamic stochastic general equilibrium (DSGE) model. The structural shocks in the model are assumed to possess stochastic volatilities with a leverage effect. Then, we estimated the model using a data-rich estimation method and utilized up to 40 macroeconomic time series. We found the following three pieces of empirical evidence in the Great Recession (Dec. 2007–Jun. 2009) worsened further by the collapse of Lehman Brothers in September 2008. First, the net-worth shock of financial firms had gradually declined prior to a huge decrease of net-worth of nonfinancial firms. Second, the net worth shock of nonfinancial firms accounted for large weight of the business cycles after the Great Recession, in terms of the data-rich approach with the SV of structural shocks, unlike the standard DSGE model. Third, the Troubled Asset Relief Program would have immediately worked to improve balance sheets of financial institutions, although it would not have stopped worsening those of the corporate sector for a while

R&D Growth and Business Cycles Measured with an Endogenous Growth DSGE Model

We consider how and the extent to which a pure technology shock driven by R&D activities impacts on business cycles as well as economic growth, using a medium-scale neo-classical dynamic stochastic general equilibrium (DSGE) model following Comin and Gertler (2006). We try to identify a pure technology shock by adopting "intellectual property product" first entered in 2008 SNA which can be regarded as R&D activity, and by assuming "time to build" by Kydland and Prescott (1982) in the process converting from innovations to products. Our empirical result based on a Bayesian analysis reports a common stochastic trend driven by the pure technology shock is likely to be procyclical, and it accounts for nearly half of variation of the real GDP whose remaining is explained by business cycle components. Meanwhile, a TFP shock, substituting for the R&D shocks, seems to move the common trend independently with business cycle

R&D Growth and Business Cycles Measured with an Endogenous Growth DSGE Model

We consider how and the extent to which a pure technology shock driven by R&D activities impacts on business cycles as well as economic growth, using a medium-scale neo-classical dynamic stochastic general equilibrium (DSGE) model following Comin and Gertler (2006). We try to identify a pure technology shock by adopting "intellectual property product" first entered in 2008 SNA which can be regarded as R&D activity, and by assuming "time to build" by Kydland and Prescott (1982) in the process converting from innovations to products. Our empirical result based on a Bayesian analysis reports a common stochastic trend driven by the pure technology shock is likely to be procyclical, and it accounts for nearly half of variation of the real GDP whose remaining is explained by business cycle components. Meanwhile, a TFP shock, substituting for the R&D shocks, seems to move the common trend independently with business cycle

Differentiated Use of Small Business Credit Scoring by Relationship Lenders and Transactional Lenders : Evidence from Firm-Bank Matched Data in Japan

This paper examines the ex-post performance of small and medium enterprises (SMEs) that obtained small business credit scoring (SBCS) loans by using a unique Japanese firm-bank matched dataset. The ex-post probability of default after the SBCS loan was provided significantly increased for SMEs that obtained an SBCS loan from a transactional lender. Also, the lending attitude of relationship lenders during the recent global financial crisis was more severe if a transactional lender had extended an SBCS loan to a firm. These findings suggest that SBCS loans by a transactional lender are more prone to type II errors and detrimental to a relationship lender’s incentive to provide “liquidity insurance”

Trends, Cycles and Lost Decades: Decomposition from a DSGE Model with Endogenous Growth

In this paper we incorporate endogenous productivity growth into a medium-scale new Keynesian dynamic stochastic general equilibrium (DSGE) model, to which a new shock regarding R&D activities is added. By matching the model parameters to the Japanese economy from 1980:Q2 to 2013:Q4 and decomposing the output into trend and cycle components, we find that the stagnation of the so-called lost decades was caused by a decline in economic growth as well as major recessions in the business cycle. The common trend estimated by our model is based on multiple time series data and is much more volatile than the trend extracted by either the Hodrick-Prescott or the band-pass filter