The profitability of banks in Japan

Abstract

This article investigates the profitability of Japanese banks following the major financial crisis that affected the country's economy in the mid-1990s. Further, it examines the determinants of bank profitability for a sample of banks with different ownership structures (City, Trust, Regional, Second Association Regional, Shinkin and Other Credit Cooperatives). We find evidence that well capitalized, efficient banks, with lower credit risks tend to outperform less capitalized, less efficient counterparts with higher credit risks. Second Association Regional banks and Shinkin banks (but not other ownership types) appear to benefit from diversification advantages which feed through to profitability. Furthermore, we find that industry concentration, Gross Domestic Product (GDP) growth and the extent of stock market development play an important role in determining the profitability of Japanese banks.

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