The Japanese Big Bang: The Effects of 'Free, Fair and Global'

Abstract

The Japanese “Big Bang” financial deregulation started in 1996. The objective was to make the Japanese banking sector more “free, fair and global”, spurring competition and resulting in a more profitable and efficient financial sector. The Big Bang brought about a massive consolidation of Japan’s already relatively concentrated banking sector. Japan’s “Top 20” banks have now merged to just three financial conglomerates that are among the largest in the world. Is this a sign of the success? Focusing on the Big Bang’s stated objectives of promoting profitability and efficiency, this study examines the Japanese “Big Bang” deregulation from its start in 1996 to completion in 2001, and the following eight years.

On profitability, we find that the banking sector as a whole did not become more profitable than the pre-deregulation period. Rather, we see a steady decline in profitability. In addition, the main targets of the deregulation (and the most active in mergers and acquisitions activity during our sample period), the city, trust and long-term credit banks, actually exhibit lower profitability measured in ROA and ROE than the smaller regional banks. The “Big Bang” did not succeed in promoting a more profitable banking sector.

We next turn to efficiency. We find that in terms of cost reduction, the banking sector did become more efficient after the Big Bang deregulation. However, the real bottom line of performance, profit efficiency, declined. In addition, we again see a significant difference between the big city, trust long-term credit banks and the smaller regional banks. The biggest banks are statistically significantly less profit efficient, despite their higher cost efficiency.

Thus, on the whole, the Japanese “Big Bang” financial deregulation was not successful in achieving its stated objectives. Both profitability and efficiency declines on the whole, and the main targets of the deregulation, the big city, trust and long-term credit banks, exhibit statistically significantly lower profitability and efficiency than their smaller counterparts.

Keywords: Deregulation, Profitability, Efficiency

JEL Classification: G21, G28