Trade Credit in Japan:
Relationship with Bank Loans
November 2003
Iichiro Uesugi
Research Institute of Economy, Trade and Industry
and METI
1
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 ?
2
Trade credit use in Japan
Trade Payable/ Asset Ratio
(by industry)
Liabilities/ Asset Ratio
(by number of employees)
30.4
-20
27.1
39.8
3.6
301-
25.4
construction
101-300
21.4
19.2
21-100
number of employees
-20 employee
21-100
21.8
29.6
8.8
19.6
18.5
19.2
18.1
manufacturing
22.6
101-300
20.6
20.5
16.1
35.0
wholesale
38.9
40.0
loan(short)
loan(long)
301-
11.9
12.3
12.5
14.1
trade payable
17.7
19.0
retail
capital
0%
10%
20%
30%
40%
50%
60%
70%
80%
25.5
90%
100%
Financial Statements Statistics of Corporations
(Ministry of Finance)
0
10
20
%
30
40
Survey of Financial Environment (Small and
Medium Enterprises Agency)
50
3
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
4
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)
(2)
(4)
(5)
Highest short-term interest rate paid within the year,
provision of collateral, (3) personal or government backed guarantee,
type of main bank
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 firm’s behavior between two years.
5
Analysis of trade credit using SFE

See the effect of idiosyncratic changes of a firm’s
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
changes in ratings and sales
Change in the liability composition
(Trade credit vs. Bank loan)
Change in other credit conditions
(Interest rate, collateral provision,
pressure from main bank, etc.)
6
Corporate ratings

1500
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.

400
440
379
370
358
1218
1000
296
275
272
Frequency
300
324
217
100
127
500
200
198
114
409409
327
305
77
28
23
15
7 5 4 1
1
33
1 1 3 2 2 8 6 9 16 18
200
132
54
166
137
57 66
20 23 11 7 2 3 2
0
1
20
38
0
1
10
2 5
42
20
40
60
ratings
80
-20
-10
0
d(ratings)
10
7
Relationship between Corporate Ratings and Liabilities
(entire sample)
Quartiles
Change in
ratings
first
second
Less than -2
third
Less than 0
fourth
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.
8
3
Relationship between Ratings and Liabilities
(entire sample)
+2.57
d(trade payable/total asset)
d (loans/total asset)
2
d(short-term loans/total
asset)
d(long-term loans/total asset)
+0.98
1
%
+0.37
0
first
second
third
fourth
-0.7
-1
-1.07
-1.34
-2
-1.55
-2.04
-3
Quartile
ratings drop
ratings rise
9
Relationship between Ratings and Non-Balance Sheet Items
(entire sample)
quartile
number of (second)
regional banks
first
second
third
fourth
2.452
2.452
2.186
+0.091%
+0.165%
+0.037%
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
d(highest short-term
interest rate)
Ratio of firms with
request for higher
interest rate
2.050
Avg.
2.286
-0.014% +0.068%
*Change in length of payment terms is the average of 1(=shorter than previous year), 2(=unchanged), and 3(=longer). 10
Relationship between Ratings and Liabilities
(with/without collateral or guarantee)
5
+4.07
4
d (trade payable/total asset)*
d (loans/total asset)*
d (trade payable/total asset)**
d (loans/total asset)**
3
2
+1.32
+1.08
1
%
+0.27
-0.24
0
first
third-0.39
second
fourth
-0.95
-1
-2
-3
-2.93
-4
Quartile
* 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.
11
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)
12
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%
+1.40%
-4.26%
-6.80%
-14.02%
-5.99%
-3.25%
-6.34%
-4.86%
-6.69%
-5.83%
Trade payable (excl.
purchase amount)
Loans
13
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)
14