Japan’s Return to Positive Interest Rates: Why It Matters and Why It Took So Long?

For the first time in nearly two decades, Japan has stepped away from negative interest rates. In early 2024, the Bank of Japan raised its policy rate above zero, marking a historic shift in global monetary policy.

But why did Japan have negative interest rates in the first place? Why did they last so long? And what happens now?

Let’s break it down.

What Are Negative Interest Rates?

Typically, interest rates reward saving and discourage borrowing. Negative interest rates flip that logic on its head.

In theory:

• Banks are charged for holding excess reserves at the central bank

• This encourages banks to lend more

• More lending → more spending → higher inflation and growth

  
  

Japan adopted negative rates to fight a problem most countries fear the opposite of: deflation.

Why Japan Had Negative Rates for So Long

1. Japan’s “Lost Decades”:

After Japan’s asset bubble burst in the early 1990s, the economy entered a long period of:

• Weak growth

• Falling or stagnant prices

• Low consumer spending

  
  

Deflation became entrenched. When people expect prices to fall, they delay spending, which further slows the economy.

2. An Ageing Population:

Japan has one of the oldest populations in the world. Older populations tend to:

• Save more

• Spend less

• Borrow less

  
  

That makes it harder to generate inflation and economic momentum, even with cheap money.

3. Traditional Policy Tools Stopped Working:

Japan cut interest rates to zero in the late 1990s — and it still wasn’t enough.

So the Bank of Japan experimented:

• Zero interest rates

• Quantitative easing (buying bonds and ETFs)

• Negative interest rates (from 2016)

  
  

The goal wasn’t growth at all costs — it was preventing stagnation.

4. Fear of Tightening Too Early:

Japan watched other countries raise rates, only to fall back into recession. Policymakers were cautious. Very cautious.

For years, inflation remained below target, wages barely rose, and tightening policy too early risked undoing fragile progress.

So, Why Raise Rates Now?

Three significant changes made favourable rates possible.

1. Inflation Finally Appeared:

Japan is now experiencing sustained inflation, not just temporary price spikes. This matters because central banks care less about one-off inflation and more about whether it sticks.

2. Wages Are Rising:

Crucially, Japanese firms have started raising wages at the fastest pace in decades.

This is a big deal:

• Inflation without wage growth hurts consumers

• Inflation with wage growth is sustainable

  
  

For the Bank of Japan, wage growth was the missing piece.

3. Global Conditions Changed:

As the US, the UK, and Europe raised rates aggressively, Japan’s ultra-loose policy significantly weakened the yen.

A very weak currency:

• Raises import costs

• Increases inflation volatility

• Creates financial instability

  
  

Raising rates helps stabilise the yen and re-align Japan with global markets.

What Is the Expected Impact Now?

1. On the Japanese Economy

Don’t expect dramatic changes overnight.

• Rates are still very low

• Borrowing remains cheap

• Growth won’t suddenly surge or collapse

  
  

The move is more symbolic than restrictive — it signals confidence that Japan can stand on its own without an emergency policy.

2. On Japanese Banks and Savers:

This is mostly good news:

• Banks benefit from healthier margins

• Savers may finally see returns (even if small)

• Pension funds gain more flexibility

  
  

For years, Japan’s financial system was distorted by ultra-low rates. This begins to normalise it.

3. On Global Markets:

Japan had been a significant source of cheap global capital.

As rates rise:

• Some money may flow back into Japan

• Global bond markets could feel mild pressure

• “Carry trades” (borrowing yen to invest elsewhere) become less attractive

  
  

This won’t crash markets — but it does matter at the margins.

Why This Moment Is Bigger Than It Looks:

Japan was the last major economy still stuck in negative rates. Its exit marks the end of an era in post-financial-crisis monetary policy.

This is important because it shows:

• Economic policy can take decades to work

• Demographics matter as much as interest rates

• Central banking is as much about psychology as maths

  
  

Japan’s move isn’t about tightening — it’s about confidence. After years of fighting deflation, Japan is finally saying: We think this recovery can survive on its own.

That’s a quiet, but historic, shift.