Economic policy uncertainty and banks' portfolio adjustment: evidence from Japan

We empirically examine the impact of Economic Policy Uncertainty (EPU) on banks' portfolio adjustment under the capital requirement of Japanese banks from 2002-2019. We find that when EPU increases, Japanese banks hold more government bonds but fewer stocks. Japanese banks extend more loans to large companies but reduce loans to small- and medium-sized enterprises (SMEs). Internationally active banks reduce securities drastically relative to domestic banks.