Credit supply shocks and employment adjustments in Japanese listed firms

This study investigates how idiosyncratic shocks to Japanese banks affect employment adjustments among listed firms, with a focus on differences across employment contract types. Using detailed matched bank-firm loan data from 1990 to 2013, I identify bank-specific loan supply shocks and examine their effects on employment over the business cycle. The results show that Japanese listed firms primarily adjust temporary rather than permanent workers in response to credit supply shocks. The adjustment mechanism varies with loan dependence: highly loan-dependent firms tend to reduce temporary employment when confronted with negative credit supply shocks, whereas less loan-dependent firms increase it. This pattern is especially pronounced among non-manufacturing firms and those listed on junior stock markets, where the use of temporary workers is more prevalent and external financing costs are higher. There is no statistically significant evidence that credit supply shocks operate through alternative channels, such as wage adjustments or firm delistings. • I examine how credit supply shocks affect employment in Japanese listed firms. • Employment adjustments are analyzed by contract type: permanent vs. temporary. • Firms adjust temporary rather than permanent employment in response to such shocks. • Loan-dependent firms reduce temporary employment after negative credit shocks. • Wage adjustments and delistings are not primary responses to these shocks.