We present a structural estimation of regionally heterogeneous demand elasticity and the
degree of competition in Japanese local loan markets under prolonged monetary easing.
Our estimates show that lending competition intensifies in markets where banks hold more
slack liquidity caused by monetary easing, and where loan demand is less elastic against
lowering interest rates due to a rapidly aging population. We also find evidence for “search-
for-yield”, ie, banks in more competitive markets are driven to extend riskier loans.