The technical efficiency of the Japanese banks: Non‐radial directional performance measurement with undesirable output

The paper analyses technical efficiency of the Japanese banks from 2000 to 2007. The estimation technique is based on the Russell directional distance function that takes into consideration not only desirable outputs but also an undesirable output that is represented by non‐performing loans (NPLs). The results indicate that NPLs remain a significant burden as for banks' performance. We show that banks' inputs have to be utilised more efficiently, particularly labour and premises. We also argue that a further restructuring process is needed in the segment of Regional Banks. We conclude that the Japanese banking system is still far away from being fully consolidated and restructured.