The interplay between quantitative easing, risk and competition: The case of Japanese banking

Mamatzakis, Emmanuel C and Vu, Anh N (2018) The interplay between quantitative easing, risk and competition: The case of Japanese banking. Financial Markets, Institutions and Instruments, 27 (1). pp. 3-46. ISSN 0963-8008

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The Japanese economy is infamous for the magnitude of bank nonperforming loans that have originated back in the 1990s, whereas they are still causing controversies. Japan is also known for an extended quantitative easing programme of unprecedented scale. Yet the links between risk-taking activities, quantitative easing and bank competition are largely unexplored. This paper employs, for the first time, the Boone indicator to measure bank competition in Japan to examine these underlying linkages. Given the scale of nonperforming loans, we explicitly measure bank risk-taking based on a new data set of bankrupt and restructured loans. The dynamic panel threshold and panel Vector Autoregression analyses show that enhancing quantitative easing and competition would reduce bankrupt and restructured loans, but it would negatively affect financial stability. Given the recent adoption of negative rates in January 2016 by the Bank of Japan, our study provides new insights as clearly there is a trade-off between quantitative easing and financial stability beyond a certain threshold. Caution, therefore, regarding further scaling up quantitative easing is warranted.

Item Type: Article
Keywords: bank risk-taking; Boone indicator; dynamic panel threshold analysis; Japan; Quantitative easing
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance
H Social Sciences > HG Finance > HG1501 Banking
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Depositing User: Emmanuel Mamatzakis
Date Deposited: 07 Mar 2018 15:49
Last Modified: 12 Mar 2018 16:45

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