An Empirical Analysis of Japanese Banking Behavior in a Period of Financial Instability

Abstract

In this paper, we undertake to analyze the bank behavior in Japan during the period of financial instability between 1982 and 1995.We focus attention on empirically uncovering some factors which may have potentially initiated and sustained instability in the level ０ｆloans extended by the Japanese banking industry.The development in this paper revolves around the following items.First, (a) we document evidence against profit-maximization and in favor of the fact that the Japanese banks in fact tended to supply loans beyond profit-maximization levels, thus accentuating the excess loan problem.Second, (b) the Japanese banks have recognized-certainly during the instability period, existence of interdependence (externalities) among themselves with reference to loan supply decisions.We explore how the Cournot-type conjectural variation we consider, which engenders interdependence, has induced banks to indulge in aggressive loan expansion.Third, (c) we examine the bearing of the calllending rate on the financial instability.Fourth, (d) following the lead of several previous works, we investigate whether the capital requirement of the Basle Accord helped curtailloan levels.Finally, (e) we look at the impact of the land price on loan, both from the demand side and the supply side; study of the demand side is made possible by our use of an aggregate loan demand function, absent in most previous works.

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