Measuring concentration in the Japanese loan and deposit markets

This study is the first to exhaustively calculate the degree of concentration in regional banking markets using the outstanding amount of loans and deposits at branches and headquarters of financial institutions in Japan. Calculating the Herfindahl-Hirschman Index (HHI) for loans and deposits for each prefecture and for each urban employment area for the period 2005–2019, we show differences in the HHI across regions and developments in these differences over time. Furthermore, we decompose the level of and changes in the HHI into two components: the contribution of the number of financial institutions and the contribution of the deviation of individual financial institutions’ market share from the mean. We also examine the extent of the increase in the HHI caused by mergers of financial institutions and its persistence. The main results obtained are as follows. First, while the HHIs for loans and deposits show an upward trend, the HHI for loans in large metropolitan areas, which was already low, continued to further decline, indicating that competition among financial institutions in large metropolitan regions, which already was severe, has continued to intensify. Second, increases in the HHI are not only due to reductions in the number of financial institutions but also to the growing variation in financial institutions’ market share. And third, while an increase in the loan HHI due to a merger of financial institutions is sustained for a certain period, the duration of such an increase tends to be shorter in regions with a low market concentration.