Credit Allocation and Real Effects of Negative Interest Rates: New Micro-Evidence from Japan

In this paper, we investigate the effects of the negative interest rate policy (NIRP) on bank credit offering and the borrowing behavior of firms by using tens of thousands of bank-firm matched data for Japanese listed firms. By utilizing the difference-in-difference method, we find that the implementation of the NIRP in February 2016 by the Bank of Japan has a significantly negative impact on loans from banks with larger reserves. Furthermore, the negative interest rate led to heterogeneous credit allocation effects, that is, banks with lower capitalization increased loans to risky firms or firms with lower distance-to-default. In addition, non-financial firms that borrow from banks with high exposure to the negative interest rate decreased their fixed investments. Further, we also provide insight into the unintended effects of the NIRP in terms of profitability channel by demonstrating that a bank's high reliance on deposit funding does not necessarily lead to the existence of a reversal rate, unlike previous studies using European data.