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.