Trade Credit in Japan:

1

Trade Credit in Japan Relationship with Bank
Loans
November 2003 Iichiro Uesugi Research Institute
of Economy, Trade and Industry and METI
2
Questions to be answered

• How is trade credit used in Japan ?
• A loan a supplier extends to its customers upon
  product sales
• Classified as a trade payable/receivable
• Involves closer ties with business transactions
  than bank loans do
• Is there substitutability between trade credit
  and bank loans ?

3
Trade credit use in Japan
Financial Statements Statistics of Corporations
(Ministry of Finance)
Survey of Financial Environment (Small and Medium
Enterprises Agency)
4
Data for analysis in Japan

• The Survey of Financial Environment (SFE) by
  Small and Medium Enterprises Agency of Japan
• Years 2001 and 2002
• Number of observations 7,656 (2001) and 8,446
  (2002) out of 15,000--4,065 firms appear in both
  years
• Ratio of small and medium enterprises 85.1
• Recently available for research use

5
In praise of the SFE dataset

• Includes not only balance sheet but non-balance
  sheet items--similar to the U.S. Survey of Small
  Business Finances (SSBF)
• (1) Highest short-term interest rate paid
  within the year,
• (2) provision of collateral, (3) personal or
  government backed guarantee,
• (4) type of main bank
• (5) requests to accept an interest rate
  increase, etc.
• Contains a sizable number of small and medium
  enterprises
• Can be a panel, while U.S. SSBF is for cross
  sectional analysis only
• SFE can trace changes of a firms behavior
  between two years.

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Analysis of trade credit using SFE

• See the effect of idiosyncratic changes of a
  firms environment on trade credit, bank loans
  and other credit or loan conditions.
• Fluctuations of corporate ratings and sales are
  employed.
• We first use the entire sample and then divide it
  by main bank type, collateral provision and
  ratings level

7
Corporate ratings

• In Japan, several private credit research
  companies produce ratings for firms based on
  credit research and interviews
• We use ratings by Tokyo Shoko Research, Ltd.

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Relationship between Corporate Ratings and
Liabilities
(entire sample)
Quartiles first second third fourth Avg.
Change in ratings Less than -2 Less than 0 Less than 1 Larger than or equal to 1 Avg.
number of samples 853 818 1218 760 3649
Total assets 4392 4229 4213 3418 4092
d(trade payable) -96 -75 -62 -27 -65
d(loans) -9 -58 -35 -44 -36
d(short-term loans) 25 -16 2 -17 -1
d(long-term loans) -34 -43 -38 -27 -36
Unit is in million yen.
9
ratings drop
ratings rise
10
Relationship between Ratings and Non-Balance
Sheet Items
(entire sample)
quartile first second third fourth Avg.
number of (second) regional banks 2.452 2.452 2.186 2.050 2.286
d(highest short-term interest rate) 0.091 0.165 0.037 -0.014 0.068
Ratio of firms with request for higher interest rate 0.229 0.181 0.171 0.194 0.194
ratio of firms newly providing collateral 0.048 0.055 0.044 0.052 0.049
---- personal guarantee 0.142 0.126 0.125 0.127 0.130
---- government backed guarantee 0.058 0.079 0.066 0.066 0.067
Change in length of payment terms 1.969 1.980 1.956 1.940 1.961
Change in length of payment terms is the average
of 1(shorter than previous year), 2(unchanged),
and 3(longer).
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Real lines are for firms whose bank loan is backed by government guarantee.
Dotted lines are for firms whose bank loan is not backed by collateral or guarantee.
12
Adjusting for transaction motive for trade credit

• Substitution between trade credit and loans
• However, decline of trade credit is largely due
  to reduction of purchase since transaction demand
  is one of the motives for trade credit.
• Suppliers may be eager to extend credit to
  distressed firms even though they are forced to
  cut trade credit due to purchase drop.
• To measure eagerness, we have (growth rate of
  trade payable) (growth rate of purchase amount)
  adjusting for transaction motive.

Relationship between purchase amount and trade
payable (trade payable outstanding) is
proportional to (purchase amount) (ratio of
credit on account) (length of trade credit
payment)
13
Growth Rate of Loans, Trade Payable, and Trade
Payable Adjusted for Purchase Amount
quartile first second third fourth Avg.
Trade payable (incl. transaction demand) -31.69 -12.84 -5.05 4.62 -11.32
Purchase amount -33.09 -8.58 1.74 18.64 -5.33
Trade payable (excl. purchase amount) 1.40 -4.26 -6.80 -14.02 -5.99
Loans -3.25 -6.34 -4.86 -6.69 -5.83
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Summary

• Trade payable and loans are substitutes
• Trade payable declines in response to
  deteriorating ratings or sales--suppliers are
  quick to distance themselves from bad businesses
• In contrast, loans gain a larger share even
  without collaterals or guarantees--financial
  institutions respond slowly to changes in the
  business environment
• Trade payable adjusted for purchases gives some
  qualifications
• Adjusted trade payable responds positively to a
  ratings or sales drop
• Eagerness to extend credit may be similar
  between suppliers and financial institutions.
• Further analysis is needed
• Decent econometric model, not just descriptive
  statistics
• Impact on the real economy, such as employment
  and investment
• Role of large trade corporations (Shosha)