The Finance-Growth Nexus of Japan: Do Real Interest Rates Matter?

This paper applies a threshold regression model to explore whether the finance-growth nexus of Japan is affected by real interest rates. Empirical evidence of this study indicates that real interest rate has significant threshold impacts on the finance–growth nexus of Japan. Our evidence shows that banks are important contributors to economic growth when the real interest rates are higher and have made insignificant influence when the real interest rates are lower. The effects of the stock market on economic growth are not significantly related to real interest rates. The empirical results imply that banks behave differently during different interest rate regimes. If the real interest rates are relatively low, the function of banks is limited, weakening the finance-growth nexus. This paper discusses some implications for the low interest rate policy of Japan