Still, we need to recognize some facts in an extremely low interest rate environment. First, when short-term nominal interest rates come down to an extraordinarily low level, the smooth functioning of interbank money markets is undermined and the margin for financial institutions is also reduced. As a result, incentives to extend loans at financial institutions are weakened, resulting in the diminished monetary easing effects.
32 Second, protracted low interest rates play an important role in preventing an economic downturn, but, at the same time, they tend to delay adjustment in excesses accumulated during the period of bubble expansion. In addition, they also tend to delay the rejuvenation of businesses.