Japanese Banks Research Articles

Economies of scope in the Japanese banking industry

Economies of scope are usually considered a key factor in explaining bank diversification benefits, as joint production can help spread costs across different operations. However, previous studies have yielded little evidence of scope economies in the banking sector, which fails to explain the empirical results of diversification benefits, especially in Japan. Given that most relevant studies were conducted prior to 2000 and newer methodological approaches have emerged to enhance estimation accuracy, we refocus to this topic and explore the relationship with bank diversification. In this paper, we estimate economies of scope while considering the growing off-balance sheet activities within the Japanese banking industry. Using a sample including 120 Japanese banks from 2000 to 2020, we estimate the cost frontier with a translog cost function through the stochastic frontier analysis (SFA) approach. In addition to the traditional measures, we incorporate a new measure of scope economies proposed by Chavas and Kim (2010), allowing us to decompose the scope economies into four different effects. Our findings suggest that nearly all Japanese banks exhibit economies of scope, which may explain the diversification benefits observed in Japan. Furthermore, we find a negative relationship between economies of scope and the level of bank diversification.

Wavelet quantile correlation between DeFi assets and banking stocks

We examine time frequency quantile correlation and portfolio benefits between decentralized finance (DeFi) assets and G7 banking stocks We employ wavelet quantile correlation to examine the correlation between DeFi and bank stocks. Notably, results reveal diversification benefits in the short to medium term and highlight DeFi assets' hedging and safe-haven properties, particularly against Japanese banking stocks. Further, bivariate portfolio analysis provides optimal allocation strategies. Our research offers new guidance for investors, portfolio managers, and regulators regarding the intersection of DeFi and traditional banking stocks.

The challenge of phasing-out fossil fuel finance in the banking sector

A timely and well-managed phase-out of bank lending to the fossil fuel sector is critical if Paris climate targets are to remain within reach. Using a systems lens to explore over $7 trillion of syndicated fossil fuel debt, we show that syndicated debt markets are resilient to uncoordinated phase-out scenarios without regulatory limits on banks’ fossil fuel lending. However, with regulation in place, a tipping point emerges as banks sequentially exit the sector and phase-out becomes efficient. The timing of this tipping point depends critically on the stringency of regulatory rules. It is reached sooner in scenarios where systemically important banks lead the phase-out and is delayed without regional coordination, particularly between US, Canadian and Japanese banks.

A non-linear Lasso and explainable LSTM approach for estimating tail risk interconnectedness

ABSTRACT Tail risk inter-connectivity is a significant aspect and a risk indicator that should be focused on. Many of the previous works have shown potential non-linearity in tail risk contagion. With the recent advancements in deep learning, Long-Short Term Memory (LSTM) networks have played an important role in sequential data prediction. We experiment with LASSO-based neural networks and interpretative LSTM model along with other machine learning approaches for investigating tail risk interconnectedness among the public banks of Japan. We also investigate the risk reception from large overseas banks in United States finding that medium-sized banks are more likely to receive international risks. Our studies show that LSTM-based model is an excellent fit for the scenario and total connectedness goes up during an economic crisis. The banks having larger market capitalization are more prone to emission and reception of tail risks. This is accompanied by exhibiting the impact of some major economic distresses on Japanese banking system. These results provide important information to regulators and policy makers.

When banks become pure creditors: The effects of declining shareholding by Japanese banks on bank lending and firms’ risk-taking

This study empirically examines the impact of an exogenous decrease in banks’ shareholding on bank loans and firms’ risk-taking, utilizing a regulatory change in Japan relating to banks’ shareholding as an instrument. We find that an exogenous reduction in a bank’s shareholding decreased the bank’s share of loans in the client firm’s total loans, while it increased the volatility of a firm’s return on assets. The reduction in a bank’s shareholding did not affect firm risk as perceived by equity investors or its borrowing terms. These findings are consistent with the prediction that banks hold equity claims over client firms to gain a competitive advantage, and are weakly compatible with the prediction that banks’ shareholding mitigates shareholder–creditor conflict.

Zombie lending, labor hoarding, and local industry growth

After the bursting of real estate bubbles in 1991, Japanese banks continued lending to unviable firms to conceal problem loans. We revisit Japan’s experience and propose a new mechanism via which banks’ loan-evergreening policy undermines allocative efficiency across industries by focusing on construction and real estate loans. Namely, banks’ continuing support for construction and real estate firms encourages labor hoarding in unviable construction projects. Since construction projects predominantly use low-skilled workers, banks’ loan-evergreening policy in these troubled sectors may depress other low-skilled industries. Based on the industry-level data in each of Japan’s 47 prefectures from 1992 to 1996, we document empirical facts consistent with this hypothesis. On average, low-skilled industries experienced disproportionately slower output and employment growth and more sluggish growth in the number of new establishments in prefectures where the share of bank loans to local construction/real estate sectors increased more after construction boom ended.

Assessing resilience to systemic risks across interbank credit networks using linkage-leverage analysis: Evidence from Japan

The banking crisis started in March 2023 was triggered by disproportion of deposit liability and assets. Applying balance sheets from 1999 to 2022, from the Japanese Bank Association, this study scrutinizes the durability of high-priority banking systems against damaging events in that industry. Eyeing the unique high-level savings in Japanese banking, this study investigates the impact of disproportion of deposit liability and assets on the financial stability of interbank credit networks through a linkage-leverage analysis. This study presents a novel framework that combines actor-network theory, network optimization, and bilateral risk exposure approaches into linkage-leverage analysis. The results in this study show that the bilateral risk exposure during a subset of years is smaller than other years, which indicates that Japanese banks minimize the risk exposure by shifting the network relationship. Finally, this study provides supporting evidence to the new paradigms on developing more stable financial systems.

Economic freedom and banks' risk-taking in Japan: a tale of two sides

PurposeThis study examined how economic freedom and its related components, such as open markets, regulatory efficiency, rule of law and the size of government, affect bank risk behavior, focusing on the Japanese context.Design/methodology/approachThe study employs a two-step GMM framework on the annual data of Japanese banks ranging from 2005 to 2020 to empirically test the hypotheses. Furthermore, we also use the ordinary least square method to ensure the robustness of our mainline findings.FindingsThe finding suggests that economic freedom increases the banks' risk-taking, thus making them fragile. The results also highlight that out of the four main subcomponents of economic freedom, regulatory efficiency and government size increase bank risk-taking, while the rule of law and open markets decrease banks' risk-taking. Additionally, we examine how the banks' specific characteristics affect the results by creating a subsample based on capitalization and liquidity ratios. Overall, the results are consistent with the baseline findings. Moreover, the results are robust to alternative proxy measures of risk.Practical implicationsThe study's findings have several implications for regulators and policymakers. The results suggest that regulators and policymakers should reconsider their strategies for economic freedom to ensure that they promote stability in the banking system and reduce banks' risk-taking inclinations.Originality/valueAlthough previous studies have examined the impact of economic freedom on bank stability and risk-taking, this study is the first to do so in the Japanese context, contributing to the literature by providing new insights and empirical evidence.

Bank diversification and performance: Empirical evidence from Japan

AbstractThis article examines the relationship between bank diversification and performance in the Japanese banking sector. We use panel data from 141 banks over the period 2000–2022 to investigate whether banks can improve profitability and reduce risk through diversification strategies. Our evidence shows that diversification can improve bank profitability at the cost of a decline in net interest margins, suggesting banks are using the interest business as a loss leader to promote other business lines. We find that asset diversification has a risk‐reducing effect, which supports the portfolio hypothesis. Some evidence also implies that there is a more complex nonlinear relationship. This can be partly attributed to bank type, as the diversification effects vary across different types of banks. Furthermore, the decomposition of non‐interest income reveals that fees and commissions negatively influence return on assets while simultaneously reducing bank risk.

Economic policy uncertainty and banks’ portfolio adjustment: evidence from Japan

ABSTRACT We empirically examine the impact of Economic Policy Uncertainty (EPU) on banks’ portfolio adjustment under the capital requirement of Japanese banks from 2002–2019. We find that when EPU increases, Japanese banks hold more government bonds but fewer stocks. Japanese banks extend more loans to large companies but reduce loans to small- and medium-sized enterprises (SMEs). Internationally active banks reduce securities drastically relative to domestic banks.

How competitiveness evolved in the Japanese bank loan market between 1977 and 2020

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.

Estimating Japanese bank performance: Stochastic entropic analysis on the basis of ideal solutions

We propose a stochastic entropic analysis based on ideal solutions and apply it to evaluate the performance of Japanese banks. Not only is the odds ratio of the learning feedback modeled by Beta-distributed priors, but our innovative model also combines the advantages of Data Envelopment Analysis (DEA) and the Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) in performance evaluation. The information gains in terms of contextual variables are predicted using Machine Learning methods. Our findings demonstrate that our proposed method generates more comprehensive performance scores compared to DEA and TOPSIS. Additionally, we find that total liabilities, total assets, and total deposits, in that order, are the three most relevant inputs for understanding the outputs. Operating revenue, total income, and total loans are the output variables most pertinent to comprehending input behavior. We argue that while mutual information seems important in explaining efficiency variations, continuous improvement in the production process plays an even more crucial role in enhancing the performance of Japanese banks.

ESG ACTIVITIES AND FINANCIAL PERFORMANCE IN BANKING INDUSTRY

This study aims to provide empirical evidence regarding how ESG practices have impacted financial performance in the banking sector. To investigate this relationship, we use an annual dataset of an unbalanced panel of 58 commercial banks from 6 countries (i.e., Canada, the UK, Australia, Japan, Spain, and Türkiye) for the period 2012-2020. Our empirical findings reveal that there exists an inverted U-shaped non-linear association between ESG scores and financial performance of Canadian, UK and Japanese banks, which supports the idea of the “too-much-of-a-good thing” impact. However, a positive linear association exists for Australian and Spanish banks. Moreover, changes in ESG activities have no influence on profitability of Turkish banks. The findings demonstrate that bank managers should consider the diversity of linkages between ESG activities and financial performance in the banking sector when identifying an appropriate stra

The effect of bank recapitalization policy on credit allocation, investment, and productivity: Evidence from a banking crisis in Japan

This paper examines the ramifications of government capital injections into financially distressed banks during the 1997 Japanese banking crisis. Using a dataset merging firm-level financial statements and bank balance sheets, we explore whether the capital injections primarily benefited high-productivity firms or were misallocated to struggling “zombie” firms. The results suggest that post-injection banks increased lending to high-productivity non-zombie and low-productivity zombie firms. The former aligns with conventional theories prioritizing high-productivity firms for investment and productivity enhancement; the latter suggests credit misallocation toward struggling firms mainly for debt servicing. There is no evidence that these injections promoted investments among firms. The results indicate that zombie firms reduced investments, particularly in infrastructure. High-productivity non-zombie firms did not exhibit a significant investment boost despite receiving more loans but displayed positive labor and total factor productivity growth, potentially driven by sales growth and increased advertisement expenses rather than employment and wage adjustments.

Leverage and regulatory capital ratios in Japan

PurposeThis study aims to understand how quickly Japanese banks readjust their capital ratios (leverage, regulatory capital, tier-I capital and common equity) following an economic shock.Design/methodology/approachThis study uses a two-step system GMM framework to test the study's hypotheses using the annual data of Japanese commercial and cooperative banks ranging from 2005 to 2020.FindingsThe findings show that banks adjust their leverage ratio faster than regulatory capital, tier-I capital and common equity ratios. In addition to that, the results reveal that the speed of capital adjustment is higher for commercial banks than for cooperative banks, suggesting higher economic costs and implications for commercial banks. Furthermore, it is worth noting that well-capitalised (under-capitalised) banks tend to prioritise the adjustments to common equity (leverage) before considering the adjustments to leverage (common equity). According to the results, high-liquid (low-liquid) banks alter their regulatory capital and tier-I capital ratios (leverage) more quickly (more slowly) than low-liquid (high-liquid) banks.Practical implicationsThe findings suggest that when formulating and implementing new banking regulations, particularly in assessing and adjusting specific capital requirements under Pillar II of Basel III, management (including bankers, regulators and policymakers) should consider the heterogeneity observed in the rate of capital adjustment across various bank characteristics. Additionally, bank managers should also consider the speed of adjustment when determining optimal half-life and target capital structures.Originality/valueTo the author's knowledge, this study represents a pioneering investigation into the rate of adjustment of capital ratios (leverage, regulatory, tier-I and common equity) within Japan's banking sector. The study employs a comprehensive dataset encompassing both commercial and cooperative banks to facilitate this analysis. A notable contribution to the existing body of literature, this study offers a detailed analysis and emphasises the varying degrees of adjustment in capital ratios. The study also highlights the heterogeneous nature of the adjustment rate in these ratios by categorising the data into well-capitalised, under-capitalised, highly liquid and low-liquid banks.

A material balance approach for modelling banks’ production process with non-performing loans

The aim of this to study is to examine how non-performing loans on the balance sheets of Japanese banks affect their performance by adopting a material balance principle. The paper outlines how the material balance conditions can be applied when modelling banks’ production process in the presence of non-performing loans. The paper utilizes the generalized weak G-disposability principle which accounts for the heterogeneity among banks’ input quality. We test how an input-oriented model (non-performing loans are treated as an input), the weak disposability assumption and the adopted material balance approach, affect banks’ performance levels. We apply our test on a sample of Japanese banks over the period 2013 to 2019. Our findings indicate that the input-oriented model and the material balance estimator even if they present similar distributions, they account differently the effect of non-performing loans’ fluctuations over the examined period. In addition, the results under the weak disposability assumption are found to be different compared to the material balance measures and less sensitive to banks’ non-performing loans variation levels. We also provide evidence that the generalized weak G-disposability assumption captures better banks’ performance fluctuations that has been caused by the restructuring of the Japanese banking industry.

Breaking the glass ceiling: gender equality practices in a Japanese bank

PurposeThis study aims to explore the mechanism of the relationships between financial and non-financial outcomes and gender equality through a case study of a Japanese bank that has consistently pursued gender equality.Design/methodology/approachA single case study was adopted to explore the outcomes of promoting gender equality. Primary data were collected from 12 semi-structured interviews. Data were analysed by rereading and coding the interview responses coded to generate themes.FindingsThrough governance reform in Company A, women have been placed in top management positions and the number of female managers has increased, allowing frontline intentions to be reflected in decision-making. The increased number of female managers has led to a decrease in female turnover, men taking parental leave, improved training of female managers and the recruitment of excellent new graduates. The appropriate allocation of jobs to female managers and employees also meets customer needs and has led to increased sales. Finally, involvement of female employees in product development in male-dominated workplaces brings women’s experiences and perspectives to product development, resulting in the development of products that are favoured by customers.Originality/valueThis study determined the mechanism behind the relationships between financial and non-financial outcomes and gender equality, based on agency, upper echelons, resource dependence, institutional and social role theories. It also contributes to gender equality research methodology by providing compelling qualitative stories of gender equality outcomes to increase a company’s commitment to promoting gender equality.

Do bank managers signal through cash flow statements?

AbstractWe empirically examine the cash flow statements for Japanese banks and whether their managers engage in classification shifting to temper concerns about risk exposure. To create a buffer against liquidity shocks, they shift cash flows from investing and/or financing activities to operating activities. We also find robust evidence that classification shifting intensifies in higher risk situations. Although prior research on managerial discretion focuses on earning management, we are the first to show cash flow management to avoid sequential negative changes in operating cash flows. We show that these activities convey valuable information about changes in banks' risk exposure.

The Lost Decade: Research on the Japanese Asset Price Bubble

Due to the burst of Japanese asset price bubble in 1989s, Japan’s economy has started a clearly great depression, specifically manifest as downturn in GDP, decline in economic activity, decrease in the general price level, and manufacturing sector in recession. The burst of bubble directly shows as expansion on credit and money supply, overheating in assets market and economic activity. This paper aims on elaborating and analyzing Japanese unique economic development history after Second World War. This paper also focuses on how the Japanese economic miracle happened and how does Japanese economic miracle came into asset price bubble. Based on those economic policies implemented by Japanese government, including zero interest rate policy (ZIRP), negative interest rate, quantitative easing (QE), qualitative quantitative easing (QQE), and the three arrows of Shinzo Abe, this paper analyzes those policies in economic direction. This paper also researches on some other potentials and secondary influences on Japanese economy, such as Japanese corporate system since 1600s, the involvement of the USA, the plaza accord, several Japanese bank’s bad loans.

RESEARCH ON AI APPLICATION TO COST ACCOUNTING: THE POSSIBILITY OF SOLVING CHALLENGES IN BANKING ACTIVITY-BASED COSTING

ABSTRACT Activity-Based Costing(ABC) was successively introduced to the Japanese banking industry mainly in the 2000s. However, from the 2010s onward, banks that had applied ABC fell into a situation where cost accounting staff became fixed, delayed delivery of cost data for use in management, and ABC was difficult to respond to changes in strategy and organization. One of the issues that cause these problems is the excessive burden of operation and maintenance of ABC. Therefore, we will examine the possibility of solving the problem of excessive burden of operation and maintenance by applying AI. The research method was action-research in which staff members of the bank actually applied AI to one of the Japanese banks currently applying ABC and evaluated whether or not it would lead to a reduction in the operation and maintenance burden. The results showed that the current ABC and the ABC with AI were able to calculate the same quality of results much faster than the current ABC. This allowed us to make decisions faster than anywhere else, and had a higher impact on management. In other words, it became clear that one of the ABC issues that had been thought to be difficult to solve in the Japanese banking industry could be solved by using AI, which has been in full swing since the latter half of the 2010s. This study is limited to the study of the effect of AI improvements to ABC as applied to service industries such as banking. However, the results of this study have significant implications for the effective and efficient operation of management accounting in all industries. Keywords Activity-Based Costing; Bank; management accounting; Artificial Intelligence; machine learning; digital transformation