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How Do Japanese Banks Set Loan Interest Rates?: Estimating Pass-Through Using Bank-Level Data

Tomiyuki Kitamura, Ichiro Muto and Ikuo Takei
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Tomiyuki Kitamura: Bank of England

No 15-E-6, Bank of Japan Working Paper Series from Bank of Japan

Abstract: We estimate interest rate pass-through in the loan market using an individual bank-based panel dataset from Japan. Previous studies using data from European countries have presented a number of common findings, including that banks with a high proportion of relationship lending tend to set lower pass-through. In this respect, we have obtained similar results using a dataset for Japan going back to the early 2000s. We further examine the influence of borrowing firms' balance sheet characteristics on loan interest rate pass-through, and find that these factors are also important determinants for pass-through dispersion. However, we also find that after the recent global financial crisis, even banks with a high proportion of relationship lending have largely lowered loan interest rates by raising pass-through, and that pass-through has not necessarily been determined in accordance with borrowing firms' balance sheet characteristics. These results differ from those of recent studies on European countries. Possible background factors explaining this change are that (i) pressure to lower loan interest rates has risen due to extensive monetary easing and greater lending competition among banks, while Japan's banking system as a whole has maintained its resilience in the post-crisis period; (ii) demand for bank loans has increased substantially due to disruptions in the market for alternative funding sources, such as commercial paper and corporate bonds; and (iii) public measures to increase bank loans have been broadly introduced in Japan.

Keywords: Loan Interest Rate; Pass-Through; Relationship Lending; Financial Crisis (search for similar items in EconPapers)
JEL-codes: E43 E44 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
Date: 2015-07-10
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Journal Article: Loan interest rate pass-through and changes after the financial crisis: Japan’s evidence (2016) Downloads
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