Factors that Prompt Financial Institutions to Close Branches in the Tohoku Region of Japan

Abstract

This study deals with the behavior of financial institutions that recently restructured their branches or offices. Japanese financial institutions were under strict geographic banking restrictions until the mid 1990s. Although these restrictions are completely repealed now, the number of branches or offices providing financial services for individuals has decreased during this decade in Japan. According to Azegami[1](2005), this phenomenon may be caused by technological progress in finance, population decline in many municipalities, and the recession of the 1990s. Some studies show that the number of branches or offices is related to the population and the number of establishments in business areas. First we reexamined this relationship in the Tohoku Region of Japan consisting of six prefectures; Aomori, Iwate, Miyagi, Akita, Yamagata and Fukushima. The financial institutions here include city banks, regional banks, regional banks II, shinkin banks, credit unions and labor credit associations. The results support our prior studies and show that branches or offices concentrated not only in cities but also in certain small towns play a role as the economic center of the rural region. Next we investigated the relationship between the number of closed branches or offices (from the end of September in 2002 to the end of October in 2006) and several explanatory variables such as the change in population. We presumed that there were more closed branches in areas where the population or the number of establishments had decreased. From the results of our OLS analysis, we determined that the number of closed branches was significantly correlated with the decrease in establishments. Against our predictions, the coefficient of population change was positive, indicating branch closure was more frequent in the urban areas where population was still growing. Moreover, we clarified that institutions merging with others significantly decreased the number of branches. Finally, we found two cases in which one of two branches had been closed in a municipality and another two cases in which the only branch disappeared from a village. Such towns or villages are still few but inhabitants will have to pay extra transportation costs if the only branch in a town or village closes.JFL Classification: G21, R10