We construct new quarterly estimates of lending rates for 47 Japanese
prefectures for theperiod 1886-1922, and test the extent to which regional
capital markets integrated duringthis period. We analyze whether the capital
market was efficient, estimate the speed ofconvergence among the rates,
and assess the degree to which different regions wereintegrated with the main
financial centers of Japan. Interest-rate differentials between thefinancial
centers of Japan and other regions do not follow a random walk, and hence are
suggestive of market efficiency – in the sense that arbitrage opportunities did not persist.
Results from cointegration tests suggest that the integration in Japan is characterized by
multiple stochastic elements. We find the existence of four long-run cointegrating
relationships. We also find evidence that shocks occurring in a financial center, such as
the Kanto region, were transmitted to outlying regions and had permanent, but small
effects on their rates.