Negative nominal interest rates reshape how firms accumulate capital by altering the price of waiting and the behavior of financial intermediaries. Central banks in Japan, the euro area, and Switzerland have employed negative policy rates to stimulate demand and lending. Benoît Cœuré, European Central Bank, has argued such policies lower borrowing costs and encourage credit extension, while Claudio Borio, Bank for International Settlements, warns of adverse effects on bank profitability that feed back into credit supply.
How lower rates change investment calculus
A negative policy rate reduces the benchmark used to discount future cash flows, directly lowering the cost of capital for corporate investment. With a cheaper discount rate, projects that were marginal under higher yields become viable, encouraging firms to accelerate fixed investment or pursue expansion in the near term. Lower rates also compress returns on safe assets, nudging treasurers and corporate investors toward longer-duration or higher-yielding instruments. This can increase corporate appetite for acquisitions or capital-intensive projects, but it simultaneously creates incentives to substitute retained earnings for external financing because debt becomes relatively inexpensive.
Intermediaries, risk-taking, and allocation distortions
Negative rates affect the banking channel through pressure on bank net interest margins, reducing profitability for deposit-funded lenders. Claudio Borio, Bank for International Settlements, highlights that sustained margin compression can lead banks to tighten lending standards or seek higher-risk customers to preserve returns. For corporations this means divergent outcomes: large firms with access to global bond markets may exploit lower yields to increase leverage and fund buybacks, while small and medium enterprises could face credit constraints, slowing their capacity for capital accumulation. Cultural and territorial factors matter: Japanese firms operating under a long history of low rates often emphasize internal finance and stable employment, altering how rate changes translate into investment compared with firms in more shareholder-oriented economies.
Consequences for long-term capital formation are mixed. Negative rates can catalyze capital deployment and lower immediate financing costs, supporting infrastructure and growth-oriented spending. At the same time, they risk misallocation toward financial engineering or marginal projects, and can weaken bank intermediation that otherwise enables steady funding of productive investment. Policymakers and corporate managers must weigh short-term stimulus against potential medium-term distortions in how capital is accumulated across sectors and regions.