Has Competition in the Japanese Banking Sector Improved?

interest rates. The sign of b₄ is expected to be negative, because loans to smaller firms
are often riskier. Since operation funds are generally advanced by shorter loans than
equipment funds, the sign of b₅ depends on the shape of the yield curve of the term
structure of interest rates. As the yield curve is usually increasing, we expect that it is
negative.

A merit of the estimation method of this paper is that by using panel data, it gives the
estimates of the degree of competition every year, which enables us to investigate the
short-term changes in the degree of competition. On the other hand, the method proposed
by Bresnahan (1982) and Lau (1982) only reveals the average degree of competition for a
long period, because it uses aggregated time series data.

4. Results

4.1 Data

We select regional banks and city banks as samples. Long-term credit banks, trust banks,
and smaller cooperative institutions such as shinkin banks are excluded from the analysis for
the following reasons. The former two types of banks are not ‘ordinary banks’ and their
operations are substantially different from those of city and regional banks. The smaller
cooperative institutions generally operate in small areas. Kano and Tsutsui (2003) found
that loan markets of shinkin banks are segmented by prefecture, implying that they compete
within each prefecture. Other cooperative institutions, credit cooperatives and agricultural

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