Political Determinants of Government Loans in Japan

This paper examines the political influence on government bank lending decisions using the prefecture level panel data on Japan’s government loans from 1975 to 1992. I find that prefectures that were represented by more influential members of the ruling party, the Liberal Democratic Party (LDP), tended to receive more government loans. I also find that the amount of government loans tended to increase in the prefectures where the LDP incumbents became electorally vulnerable. These relationships between government loans and political factors are robust even after controlling for extensive socio-economic factors, fixed prefecture effects, and fixed year effects. Moreover, differences-in-differences estimation reveals that the statistical association between loans and political factors exists only in government loans, not private loans, indicating that the results are not the artifacts of fluctuation in local loan demand. These results provide empirical support for the political view of government banks and for the popular claim that government loans have served the private interests of LDP members and their supporters in Japan. Masami Imai Luce Assistant Professor of Economics Wesleyan University PAC 123 238 Church Street Middletown, CT 06459-0007 860-685-2155 860-685-2301 (fax) [email protected] JEL classification: G21; G32; D72; D73; L32; O53