The effect of bank credit on asset prices: Evidence from the Japanese real estate boom during the 1980s

This paper studies whether bank credit fuels asset prices. Financial deregulation during the 1980s allowed keiretsus to obtain finance publicly and reduce their dependence on banks. Banks that lost these blue-chip customers increased their property lending, and serve as an instrument for the supply of real estate loans. Using this instrument, I find that a 0.01 increase in a prefecture's real estate loans as a share of total loans causes 14-20% higher land inflation compared with other prefectures over the 1981-91 period. The timing of losses of keiretsu customers also coincides with subsequent land inflation in a prefecture.