Together with a deterioration in economic activity, funding conditions of large firms became increasingly tight. The worsening financial environment for large firms affected funding conditions at small firms mainly through two channels. First, since large firms that faced malfunctioning of CP and corporate bond markets had shifted their funding sources to borrowing from banks, banks responded by using much of their remaining lending capacity.
And second, the worsening of funding conditions at large firms had contracted business-to-business credit for trading partners and affiliated firms. As a result, in the March 2009 Tankan (Short-Term Economic Survey of Enterprises in Japan), the diffusion index of funding conditions plunged to the lowest level in about 10 years since 1998, regardless of firm size.