Has Competition in the Japanese Banking Sector Improved?

1. Introduction

The purpose of this paper is to investigate whether competition in the Japanese banking
sector has improved in the last quarter of the 20^th century. Over this period, a regulated
system for the Japanese banking sector that had dominated in Japan over the high growth
period has been substantially liberalized. This period includes the bubble period of the late
1980s, and the long stagnation in the 1990s in which private banks struggled with huge
non-performing loans. As a result, we expect that the degree of competition in the
Japanese banking sector has changed throughout this period.

There have been a few studies, to our knowledge, that have investigated the degree of
competition in Japanese financial industries. Molyneux, Thornton, and Lloyd-Williams
(1996) estimated the Panzar and Rosse (1987) H-statistic of Japanese banks in 1986 and
1988. They found that the Japanese banking sector was in monopoly equilibrium in 1986,
whereas in 1988 it was in monopolistic competition equilibrium.¹ Following Clark and
Davies (1982), Alley (1993) estimated a degree of collusion in the Japanese banking sector
to find a high degree of collusion in 1986 and 1987. Souma and Tsutsui (2000) applied an
approach similar to that of this paper to the Japanese life insurance industry from 1986 to
1997 to find that the degree of competition was low, but that the industry became more
competitive after 1995 when the New Insurance Industry Law was promulgated.
Kamesaka and Tsutsui (2002) estimated Panzar-Rosse’s H-statistic for the Japanese

¹ De Bandt and Davis (2000) argue that estimates of cross-section analysis often change sharply, so

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