The Effect Of Monetary Policy Uncertainty On Trade Credit: Evidence From Japan
Abstract
Prior studies show the unfavourable effect of the overall economic policy
uncertainty (EPU) on firms’ trade credit in the U.S., China and South Korea. This
research aims to investigate whether monetary policy uncertainty (MPU) – a
component of the EPU, influences corporate trade credit in Japan. The empirical
results show that MPU has a negative impact on trade credit. This finding remains
robust even after addressing the several endogeneity concerns that MPU may capture
uncertainty that is related to the overall economic policy uncertainty. Further
investigation reveals that relationship-specific investment, financial constraints,
market power, and types of products are possible explanations for the relation between
MPU and corporate trade credit in Japan. This effect remains significant for all
Japanese firms, including both firms centered around affiliated banks (keiretsu groups)
and stand-alone firms (non-keiretsu groups). The results also show that other
components of overall economic uncertainty, fiscal, trade, and exchange rate
uncertainties, are also the key factors leading to the reduction in trade credit in Japan.