The Impact of Negative Interest Rate Policy on Interest Rate Formation and Lending

This paper examines the impact of the introduction of the negative interest rate policy (NIRP) on interest rate formation and lending in Japan through literature reviews and empirical analyses. Previous studies indicated that NIRP had the effect of lowering the effective lower bound on nominal interest rates and encouraging search for yield behavior among investors, pushing down not only short-term interest rates but also long-term interest rates. Analyzing data from Japan and the euro area, we find that NIRP had a significant downward effect on interest rates for longer maturities in addition to the short-term interest rates. Next, with regard to the impact on lending, previous studies suggested that the introduction of NIRP could create accommodative financial conditions and increase lending as with conventional monetary policy that guides short-term interest rates, while it could impede the financial intermediation function by deteriorating the profitability of financial institutions ("reversal interest rate" mechanism). In this regard, analyzing data on Japanese financial institutions, we find no evidence that even financial institutions with a larger amount of deposits relative to total assets, whose earnings are likely to be affected by NIRP, experienced a declining trend in lending after the introduction of the policy. This result may have been influenced by factors such as the introduction of the three-tier system for current accounts at the Bank of Japan that eased the contractionary impact on financial institutions' earnings and maintained their risk-taking capacity.