Investigating Japanese Banking Sector Competition – A Panel Data approach Abstract This paper investigates the degree of competitiveness in the Japanese Banking Sector. Using a longitudinal data set containing information on 1018 banks covering time span of 1988-2012 and applying a modified version of the Panzar-Rosse methodology suitable for the present purpose, several interesting insights are derived…
Introduction Albeit the Japanese economy has been long hailed as the model of success in Asia, the transition towards a market oriented economy has not been smooth. Despite of the ravages left in the aftermath of the 2nd world war, the 1960’s and 1970’s saw Japan attain enormously high rates of economic growth (Johnson, 1982). The regulated financial sector working in tandem with the government and business corporations led to a stable and steady integrated economic system which allowed the economy to flourish. The Japanese banking system had a critical role to play in this phase. Not only did the banks act as corporate governing bodies, they also played roles or rescuers when enterprises where in financial difficulties. By providing loans to enterprises that were investing in sectors with strong growth potential these banks shared the risks in similar vein to venture capitalists (Wade, 1999). But in the decades of the 1970’s and 1980’s the fast growing economy compelled by the global environment of market integration had to modify its structure and attempt to adjust to the new environment. Growing domestic businesses gradually had a lower requirement to borrow from the domestic banking system. Circumvention of financing from external sources coupled with developing asset markets through the accumulation over the earlier decades led to alterations in the capital flows and liberalization of the financial sector followed (Noguchi, 1998). In the latter half of the 1980’s decade such liberalization resulted in a lack of adequate tightness in monetary conditions which in turn led to an asset oriented initial upturn and economic boom but finally the asset bubble got burst and this opened the floodgates for Japan’s economic woes. Due to the depressed market conditions the 1990’s have been famously coined as the “lost decade” (Takahashi, 2011). Since the early 2000’s the Japanese economy has been in the process of trying to recover through market oriented reforms but no remedy to the ailment which continued to make the economy weaker and the recent global financial crisis has only worsened the situation (see figures 1 to 3). Figure 1 Figure 1 above shows the path of real GDP over time. Evidently the climb is steeper and more steady until 1990 since when evidence of volatility is observed and the slope is flatter as well. A substantial dip is also visible in the mid 2000’s. Figure 2 Figure 2 reveals that the percentage of annual GDP growth has actually been quite volatile. However, more noticeably there is a downward trend in the series and the growth rate has decelerated to negative values over the last few years. Figure 3 Finally figure 3 shows the average growth rate for the four decades since 1970. Evidently the performance was substantially lower in the decade of the 1990’s and to add to the woes of the economy, the growth rate has been even lower in the 1st decade of the 2000’s. The economy is still in quest for attaining a system that has the advantage of institutional complementarities as it once had in its golden era of growth. Substantial amounts of research has established that the degree of competitiveness has important bearing on economic growth and ...
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40 Pages(10000 words)Dissertation
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