Japan's Exit from Negative Rates

For years, Japan was the world's most famous laboratory for unconventional monetary policy. In an effort to escape a long period of weak growth and falling prices, the Bank of Japan pushed its short-term interest rate below zero in 2016, effectively charging banks for parking some of their excess funds at the central bank.

The idea was to encourage banks to lend more and to push down borrowing costs throughout the economy. The policy did keep rates extremely low, but it also squeezed the profits of banks and made it harder for savers and pension funds to earn a decent return. Critics argued that its benefits were diminishing while its side effects accumulated.

In March 2024, as wages and prices finally began rising at a more sustained pace, the Bank of Japan ended negative rates, raising interest rates for the first time in seventeen years. It was the last major central bank to abandon the policy. The move was widely expected, and the bank signaled that it would proceed cautiously, so financial markets reacted calmly.

For households, the shift has mixed consequences. Depositors can expect slightly better interest on their savings, but people with variable-rate mortgages, which are extremely common in Japan, may see their monthly payments rise. How far and how fast rates climb will depend on whether inflation settles near the bank's target of two percent.