Japan Raised Rates for the First Time in Seventeen Years
The Bank of Japan moved its policy rate from minus 0.1 percent to a range of zero to 0.1 percent in March, ending the world's last negative rate regime and abandoning yield curve control.
The Move
On March 19, 2024, the Bank of Japan raised its short term policy rate from minus 0.1 percent to a range of zero to 0.1 percent. It was the first increase in seventeen years, and it ended the last negative interest rate policy anywhere in the world. The central bank also abandoned yield curve control.
In magnitude the change was tiny. In meaning it closed the most aggressive monetary experiment conducted by a major economy in modern history.
What Negative Rates Were For
A negative policy rate means commercial banks pay to hold reserves at the central bank rather than earning interest. The intent is to make holding idle money costly and push banks to lend instead.
Japan adopted this because it had spent decades fighting deflation. Falling prices are corrosive in a way that mild inflation is not. If consumers expect goods to cost less later, they defer purchases, which reduces demand and reinforces the fall. Debt also becomes heavier in real terms as prices fall. Japan had been trying to escape that trap since the 1990s.
Most central banks spent 2022 fighting inflation. Japan spent thirty years trying to create some, which is why it moved last and moved cautiously.
Yield Curve Control, Explained
The second policy retired was more unusual. Under yield curve control the central bank targeted a level for the ten year government bond yield and committed to buying unlimited quantities to defend it.
This is a different instrument from ordinary asset purchases. Standard quantitative easing fixes a quantity, saying the bank will buy a set amount per month. Yield curve control fixes a price and lets the quantity float. Defending a price target against a determined market can require unlimited purchases, and the Bank of Japan ended up owning an extraordinary share of the government bond market as a result.
The Carry Trade Connection
The global significance ran through the yen carry trade. For years investors borrowed in yen at near zero cost, converted to other currencies, and invested in higher yielding assets abroad, pocketing the difference.
The trade works while Japanese rates stay low and the yen stays weak or stable. It becomes painful when either changes, because a strengthening yen increases the cost of repaying the borrowed amount. Positions built over years can unwind in days when that happens, and the unwinding forces selling of whatever the borrowed money was invested in.
That is precisely what occurred in August 2024, when a further Japanese rate increase combined with weak United States data produced a violent global selloff concentrated in a single session. The March decision was the first step toward that unwind.
Why It Was Handled So Gently
The central bank signaled clearly that financial conditions would remain accommodative and that further increases would be gradual. That caution reflected real risk. Japanese government debt is very large relative to output, so higher rates raise the government's interest burden substantially.
The bank also owns a large share of that debt, meaning rising yields impose losses on its own holdings. Exiting a decades long intervention is genuinely harder than entering one, which is the general lesson worth taking from it.
The Bottom Line
A quarter point move ended the world's last negative rate regime and started unwinding a carry trade built over years. The size of a policy change and its consequences are frequently unrelated.