Has Competition in the Japanese Banking Sector Improved?

companies in Japan. Therefore, this deregulation did not have a significant effect on the
banking sector, contrary to the case for the securities industry.

3. Model

We assume that a bank i raises funds d_i from depositors and invests it to loans q_i and

government bonds b_i . Thus, the profit of the bank i at time t is:

^πi,t^=Pt^(Qt^)qi,t^+ri^b,t^bi,t^-ri,^dt^di,t^-Ci,t^(qi,t^,di,t^),                           (1)

n

where P_t(Q_t) is the inverse demand function for loans, Q_t ≡ ∑ q_i,t , n is the
i=1

number of banks, r_i^b_,t is the yields for bonds, r_i,^d_t is the deposit interest rate, and

C_i,t(q_i,t, d_i,t) stands for the operating cost function. The bank’s problem is:

Max     π_i,t s.t. b_i,t + q_i,t = d_i,t .                       ₍₂₎

^{bi,t ^,qi,t ^{, d}i,t ^}

The first order conditions of the profit maximization are:

₁           ∂C

Pt (1 — θi,t ) = rt +      ,                          (3)

η_t                ∂q_{i ,t}

and

_{b d} ∂C_it

r — — r_t--= = 0                                 (4)

^{i, t i, t} ∂d_it      ’                                           '>

i,t

P_t ∂Q_t                                                          qi t

where η ≡ —^t—— is the market demand elasticity for loans, S , ≡ — is the

Q_t ∂Pt                                            ^{y             i i,t} Qt

∂Q_t

market share of bank ι in loans, and θ _t = ~^^S_{i t}. Note that θ _t = 0 for perfect
i,t                              i,t                                                          i,t

^∂qi,t

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