Has Competition in the Japanese Banking Sector Improved?

insurance industry became stronger after 1995, it was still close to perfect collusion in 1997.

Kamesaka and Tsutsui (2002) found that the Japanese securities industry was in monopoly
equilibrium in the 1980s and was in monopolistic competition equilibrium in the 1990s. In
view of these results, the banking industry seems more competitive than the securities and
life insurance industries in Japan.

Although most of the results were convincing, there is one question left unanswered:
why did the degree of competition θ_t rise again after 1998? One possible interpretation
is that Japanese banks suffered from huge non-performing loans in the 1990s, and that they
have been faced with financial crisis since 1997.¹⁸ Consequently, they do not have enough
strength to compete with each other, and want to avoid severe competition, which often
leads to a cut in their profits. The clarification of this speculation regarding laxer
competition in the late 1990s should constitute an interesting study in the future.

Three large banks failed in 1997 and 1998.

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