2007 Reports

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

Nakagawa, Ryuichi; Uchida, Hirofumi

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.