We calculate the level of concentration in the Japanese loan market by region and discuss its relationship to the market power of financial institutions. This is the first study of its kind to comprehensively and accurately measure loan market concentration at a regional level in Japan. We calculate the Herfindahl–Hirschman Index (HHI) for each prefecture and urban employment area and examine the degree and persistence of the increase in the HHI following financial institution mergers, along with factor decomposition. We also examine the impact of concentration on firm interest rates. The major findings are as follows. First, while the nationwide HHI is rising (increasing concentration) it is declining in metropolitan areas, indicating a polarization of the loan market concentration in the country. Second, the HHI is rising not only because of a decline in the number of financial institutions but also because of the greater variation in market share among financial institutions. Third, the loan HHI rises at the time of financial institution mergers but the magnitude of the increase is attenuated over time. Fourth, as the HHI increases firms’ borrowing interest rates rise modestly and gradually.