Are low policy rates contractionary?

Governor Kuroda has recently discussed the idea that extremely low interest rates could undermine bank profits and capital and, ultimately, lending. Evidence for this idea is lacking in Japan, where the main pressure on bank profits is coming from overcapacity and where, in any case, bank lending is booming by Japanese standards. With inflation still well below the Bank’s 2% target, we remain convinced that the Bank will not lift interest rates anytime soon.