#05-21
Consolidation, Scale Economies and Technological
Change in Japanese Banking
Solomon Tadesse
Abstract: The paper examines the technological structure of the Japanese banking sector before the onset
of the banking crisis and structural reforms of the 90s in order to shade light on the logic of the
recent trend to consolidation in the industry. While diseconomies of scale are shown to be
pervasive in the large banks, defying the rationale for consolidation, the paper presents evidence
of an underlying technological progress that operates to significantly increase the industry’s
efficient minimum size, generating economies at larger banks, thus justifying the ongoing trend
in consolidation. The results suggest that, to the extent that consumers can benefit from lower
costs of bank production, policies that promote a more concentrated banking structure might be
consistent with public interest.
Keywords: Scale Economies; Technical Change; Banking
JEL classifications : G21; D24; O3
