Efficiency in Japanese Banking: an Empirical Analysis

This paper utilises the non-parametric frontier approach, DEA, to analyse the technical and scale efficiency in Japanese banking using a recent cross –section sample. Efficiency analysis is conducted across individual banks, bank types and bank size groups. Following Berger and Humphrey (1997), problem loans are controlled for as an exogenous influence on bank efficiency. Powerful size-efficiency relationships are established with respect to both technical and scale efficiency. Furthermore, the logic of the recent largescale merger wave in Japan is questioned as the larger (City) banks are generally found to be operating above the Minimum Efficient Scale and to have limited opportunity to gain from eliminating Xinefficiencies. The opposite result is found for the smaller banks. Finally, the results suggest that controlling for the exogenous impact of problem loans is important in Japanese banking, especially for the smaller regional banks. JEL Classification: G21; D21; G23.