Bank deposit interest rate pass-through and geographical segmentation in Japanese banking markets

•I focus on the deposit rate setting behavior of Japanese regional banks.•The pass-through from market rates to deposit rates is estimated.•Results indicate incomplete pass-through for all banks.•Pass-through rates are lower in prefectures with concentrated markets.

This paper estimates the pass-through from market interest rates to deposit interest rates to investigate whether the Japanese bank deposit markets are geographically segmented. A unique feature of this paper is the use of monthly deposit interest rates posted by 106 regional banks from March 1999 to March 2010. Following the theoretical results from a simple banking activity model with Cournot competition, I estimate the long run pass-through of each regional bank utilizing the panel cointegration method. The empirical results of this paper show a significant negative correlation between regional market concentration and pass-through, which implies the existence of geographical market segmentation.