We examine credit reallocation among Japanese firms since the 1980s. We look at both the size (i.e., the extent of credit reallocation as measured by the sum of the increase in firms’ outstanding interest-bearing debt and the decrease in their outstanding interest-bearing debt) and the efficiency (i.e., the degree to which interest-bearing debt is redirected from firms with low productivity to those with high productivity) of these reallocations. We find that while the magnitude of reallocation tends to be smaller during short-term recessions and the long-term economic downturn of the 1990s, what is unique to Japan about these reallocations is that we observe both smaller increases and decreases in interest-bearing debt holdings. As for the efficiency of reallocation, large firms experienced inefficient reallocations during the “lost decade” from the early 1990s to the early 2000s mainly due to firms that received financial support from the government. However, in other periods, credit was efficiently reallocated. In contrast, for SMEs there is no clear evidence of credit being reallocated from low-productivity firms to high-productivity firms, either in normal times or in economic downturns. It appears that credit reallocation in the SME sector has made no contribution to SMEs’ productivity growth.