We examine whether government-affiliated financial institution lending substitutes for private-sector lending through low interest rates. We first find that loan interest rates offered by government-affiliated financial institutions are lower than those of the private sector. We then focus on an exogenous institutional change in which a government-affiliated financial institution introduced a risk-adjusted loan interest rate scheme and decreased interest rates for creditworthy firms. If a substitutive relationship between the government and the private sector lending exists then this institutional change should have resulted in creditworthy firms being more dependent on government loans than less creditworthy firms. We find that the change in the JFC’s interest rate structure did not result in private-sector lending to creditworthy firms being replaced by the JFC lending. Specifically, not only is the increase in borrowing from the JFC larger for creditworthy firms than for less-creditworthy firms but also the increase in borrowing from the private sector is larger for these creditworthy firms. As a result the extent of an increase in the dependence on JFC borrowing (i.e., the ratio of borrowing from the JFC to borrowing from the private sector) is not larger for creditworthy firms than for less creditworthy firms.