Herd Behavior by Japanese Banks After Financial Deregulation in the 1980s

Center on Japanese Economy and Business Working Paper No. 257

Posted: 27 Dec 2007 Last revised: 7 Jun 2017

See all articles by Ryuichi Nakagawa

Ryuichi Nakagawa

Kansai University - Faculty of Economics

Hirofumi Uchida

Kobe University - Graduate School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2007

Abstract

This paper empirically investigates whether Japanese banks followed herd behavior as a result of financial deregulation in the 1980s, and whether any observed herd behavior brought about inefficiencies that could have caused macroeconomic fluctuations. Using loan-portfolio data, the paper examines Granger-causalities in lending behavior by different types of banks. We find that Japanese banks inefficiently herd from the early through mid-1980s, the period immediately after financial deregulation began. However, contrary to anecdotal evidence, inefficient herd behavior is rarely observed in the 1990s. The herd behavior in the 1980s was more frequently observed in lending to new borrowers than to traditional borrowers. In addition, other banks were inclined to follow those banks that were considered more informed in lending to a specific industry, or that were large enough to adjust more effectively to the environment created by deregulation. These results are consistent with theoretical predictions in the literature and suggest the possibility that the herd behavior contributed to the asset price bubble in the late 1980s.

Keywords: herd behavior, Japanese banks, financial deregulation, inefficiency

JEL Classification: G11, G14, G21, E44

Suggested Citation

Nakagawa, Ryuichi and Uchida, Hirofumi, Herd Behavior by Japanese Banks After Financial Deregulation in the 1980s (December 20, 2007). Center on Japanese Economy and Business Working Paper No. 257, Available at SSRN: https://ssrn.com/abstract=987692 or http://dx.doi.org/10.2139/ssrn.987692

Ryuichi Nakagawa (Contact Author)

Kansai University - Faculty of Economics ( email )

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Hirofumi Uchida

Kobe University - Graduate School of Business Administration ( email )

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HOME PAGE: http://www.b.kobe-u.ac.jp/~uchida

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