Where Rigour Meets
Economic Insight

Ranked first: Japan opened its corporate bond market in 1983, and the firms the main-bank literature was written about were the first to leave

Three bodies of work on the Japanese main bank disagree, and this paper shows that two of them were never in conflict: a relationship can relax a borrower's constraint and still be priced by the lender, with the split set by what else the borrower could do. Japan's bond market liberalisation supplies the test, and the order in which firms left their banks answers a question nobody could settle by asking them.

For two decades the Japanese main bank was the leading example of a relationship doing cheaply what a capital market does expensively. Three bodies of work disagree about it: one finds the relationship relaxed a financing constraint, one finds the bank kept the gains, and one finds that the institution as described barely existed. This paper argues that the first two are not in conflict, and that what separates them is the borrower's outside option, which Japan's bond market liberalisation changed and thereby supplied the test.