Determinants of Japanese Banks’ Expansion in the European Union

Abstract

The Japanese banks exhibited enormous growth in the 1980s; of particular interest was the growth of their international banking activity. This paper examines the determinants of Japanese banks’ dramatic expansion in the European Union between 1977–91. The paper seeks to study the impact of Japanese foreign direct investment, trade, exchange value of yen, cost of capital, and deregulation of financial markets on the overseas expansion of Japanese banks. The available evidence suggests a positive impact of the favorable macroeconomic conditions in the domestic financial markets on the internationalization process. The results of the multiple regression analysis provide support for the fact that increased Japanese FDI to Europe, high price-earning ratio of Japanese bank stocks evidencing cost of capital advantage, and deregulations in Japan contributed to Japanese banks’ rapid expansion in Europe. A major conclusion of the paper is that structural changes in the Japanese economy in the post-bubble era have dampened the international banking activity of Japanese banks. The changes have caused them to revise their international strategy.