WINDOW GUIDANCE BY THE BANK OF JAPAN: WAS LENDING CONTROLLED?

Abstract

Over the period 1961–1991, the Bank of Japan (BOJ) attempted to directly control the volume of commercial bank credit by providing lending targets for selected banks. This policy of “window guidance” (WG) applied to only a subset of lending institutions. The guided banks involved were under no legal obligation to heed the BOJ's requests. Using actual WG data to city banks, two questions are addressed. First, did city banks comply with WG (the “compliance hypothesis”)? Second, was WG successful in controlling economywide lending or did lending adjustments by other financial institutions simply displace the lending of guided banks (the “displacement hypothesis”)? The empirical results show a high degree of compliance in the first two decades of the program and evidence of weakening in the final years. The displacement hypothesis is rejected, particularly in the early period of highly regulated financial markets. (JEL E58, E51, E52)