Abstract

In this study, I estimate the degree of competition in the Japanese loan market using a new empirical industrial organization method. With it, I conduct a long-term analysis of more than 40 years that includes the effect of financial deregulation prior to 2000. The model adopts an appropriate identification strategy in the estimation by introducing a rotation term to the demand function. This study also has an examination of the mechanism behind the long-term development of competition to test the validity of two hypotheses: the efficient structure hypothesis and the market power hypothesis. The findings are as follows: (1) The Japanese loan market was the least competitive around 1980, and competition has intensified since then. (2) After 2000, competition has generally increased, especially among large city banks with a nationwide presence. (3) The correlation analyses between market concentration, degree of competition, and cost efficiency indicate that the results are consistent with the efficient structure hypothesis except for the period around 2000. In contrast, the results are consistent with the market power hypothesis in the 1990s, but become inconsistent thereafter.

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