7. Conclusions
In this paper, we investigated whether competition in the Japanese banking sector has
improved in the last quarter of the 20th century. By estimating the first order condition of
profit maximization, together with the cost function and the inverse demand function, we
estimated the degree of competition of city and regional banks. The results reveal that
competition had improved during the 1970s and in the first half of the 1980s. This
corresponds to the period where the secondary market for government bonds emerged. In
support of this view, the follow-up analysis of the factors affecting the degree of
competition demonstrates that the trading volume of the government bonds significantly
affected the degree of competition.
The results also reveal that Cournot oligopoly cannot be rejected at a 5% significance
level for city banks for most of the period, while the results do reject it for regional banks
over the entire period. This suggests that competition among city banks was stronger than
that among regional banks, which is consistent with our intuition.
The results are richer and more extensive than those obtained in earlier studies on the
competitiveness of the Japanese banking sector, such as Molyneux, Thornton, and
Lloyd-Williams (1996), and Alley (1993), which analyzed only a short period of time using
different methods.
Souma and Tsutsui (2000) found that although competition in the Japanese life
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