Discussion Papers 2020

CIRJE-F-1148	"Capital Market Integration with Multiple Convergence Clubs: The Case of Prewar Japan"
Author Name	Tetsuji, Okazaki and Koji Sakai
Date	March 2020
Full Paper	PDF file
Remarks

Abstract
This paper examines capital market integration in prewar Japan, using a methodology that allows for multiple equilibria in convergence. Specifically, we apply the method of log t regression and the club convergence test proposed by Phillips and Sul (2007) to examine the convergence of prefectural loan rates and detect the convergence clubs that followed heterogeneous transition paths. Whereas prefectural loan rates were converging towards two equilibria from 1888–1900, all the prefectural loan rates converged towards a unique equilibrium from 1901–1926. From 1927, however, the prefectural loan rates diverged again, and four different convergence clubs emerged. Restrictive regulation imposed by the Bank Law of 1928 reduced competition in local markets, increased barriers to interregional capital mobility, and, thereby, reversed capital market integration.

Abstract

This paper examines capital market integration in prewar Japan, using a methodology that allows for multiple equilibria in convergence. Specifically, we apply the method of log t regression and the club convergence test proposed by Phillips and Sul (2007) to examine the convergence of prefectural loan rates and detect the convergence clubs that followed heterogeneous transition paths. Whereas prefectural loan rates were converging towards two equilibria from 1888–1900, all the prefectural loan rates converged towards a unique equilibrium from 1901–1926. From 1927, however, the prefectural loan rates diverged again, and four different convergence clubs emerged. Restrictive regulation imposed by the Bank Law of 1928 reduced competition in local markets, increased barriers to interregional capital mobility, and, thereby, reversed capital market integration.