This paper investigates the relationship between fluctuations in asset prices and the real economic activity in interwar Japan, focusing on the effects of land price movements on the volume of bank lending. When what is called the “real estate finance problem” arose in the 1920s and the beginning of the 1930s, falling land prices may have affected bank lending, possibly due to the reduced collateral value of real estate held by borrowers and the reduced risk-taking capacity of the banking industry caused by impaired equity capital. Fluctuations in land prices and changes in the volume of lending made by ordinary and savings banks show similar developments, and regression analyses including panel data analyses at the prefectural level have indicated a significant relationship between land prices and bank lending. With respect to the equity capital of banking industry, consideration has been given to the scale of losses in real estate collateral loans caused by falling land prices, based on data from the Nihon Kangyo Bank.
Keywords: Interwar economy; Financial crisis; Showa depression; Asset prices; Stability of the financial system
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.