The BOJ kept rates low by buying massive amounts of bonds, directly capping long-term yields, and operating in a low-inflation, slow-growth economy where markets accepted near-zero rates for decades.
After Japan’s asset bubble burst in the early 1990s, the economy stagnated and inflation disappeared.
In 1999, the BOJ introduced Zero Interest Rate Policy, pushing short-term rates close to 0%.
Why it worked:
1. Japan had persistent deflation (falling prices).
2. Weak growth meant little upward pressure on wages or prices.
3. With low inflation, markets accepted very low nominal rates.
Starting in 2001 (and expanding massively after 2013), the BOJ began buying:
1. Japanese government bonds (JGBs)
2. ETFs (stock funds)
3. Corporate bonds
4. REITs
By buying huge amounts of government debt, the BOJ:
Increased demand for bonds
Pushed bond prices up
Forced yields (interest rates) down
At one point, the BOJ owned over 50% of Japan’s government bond market.
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Yield Curve Control (YCC)
In 2016, the BOJ introduced something more direct: Yield Curve Control.
Instead of just targeting short-term rates, they:
Set short-term rates at –0.1%
Targeted 10-year government bond yields around 0%
Promised to buy unlimited bonds if yields rose too much
This was essentially a price cap on long-term interest rates.
Markets didn’t fight it because:
Inflation was still very low
Domestic investors (banks, pensions) preferred safe JGBs
Japan funds most of its debt domestically
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Structural Conditions That Helped
The BOJ could sustain this policy because of unique Japanese factors:
A. Deflationary Mindset
For decades, businesses and households expected low or falling prices. That anchored inflation expectations.
B. Aging Population
An older population saves more and spends less → weaker demand → lower inflation pressure.
C. Domestic Debt Ownership
Japan’s huge public debt (over 250% of GDP) is mostly held by:
Japanese institutions
Japanese households
The BOJ itself
This reduced the risk of capital flight or currency crisis.
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The Trade-Offs
Keeping rates low for so long created side effects:
Bank profitability weakened
Pension funds struggled
The yen weakened (at times sharply)
The BOJ’s balance sheet became enormous
By the early 2020s, rising global inflation forced the BOJ to gradually loosen Yield Curve Control and eventually exit negative rates.
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2024-2026
Even before the new 2026 government, the Bank of Japan has been rolling back decades of ultra-easy monetary policy:
In March 2024 it ended negative interest rates and exited yield curve control — a major structural shift away from “near-zero for decades.”
Since then, the BOJ has raised its policy rate multiple times (e.g., to ~0.75 % by late 2025), taking rates to their highest levels in decades and marking a move toward normalisation.
So the era of persistently ultra-low rates has already effectively ended.
The new government under Prime Minister Takaichi may influence policy direction — but isn’t directly controlling the BOJ
Japan’s monetary policy is technically independent, so the government doesn’t directly set interest rates.
However:
The government is nominating BOJ board members, and some of the candidates are seen as reflationists — people who support continued stimulus to boost growth and inflation — which could make the BOJ less aggressive on tightening.
Recent statements from international bodies like the IMF have commended the BOJ for moving away from stimulus and urged further rate hikes while also warning against loose fiscal policy such as tax cuts.
Political moves like tax suspensions and higher spending have spooked markets, pushing yields and the yen around because of concerns about debt and inflation — which could indirectly affect the BOJ’s strategy.
So the current government’s fiscal stance might make monetary policymakers more cautious about cutting back on tightening too quickly — but the BOJ itself is still setting interest rate policy.
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Japan’s transition away from giant negative rates and toward modest positive rates is undermining aspects of the yen carry trade that have supported global liquidity and speculative flows for years. That’s:
1. Pressuring speculative assets as cheap yen funding disappears.
The yen carry trade has historically been funded by borrowing cheap Japanese yen
(because of near-zero or negative interest rates) and investing in higher-yielding assets elsewhere
2. Feeding volatility in crosses like AUD/JPY.
3. Supporting the USD vs JPY because policy divergence persists.
4. Creating ambiguity for gold — both as safe haven and as alternative asset.
Gold often benefits from uncertainty and carry trade unwinds,
because when leveraged positions in risk assets unwind, some capital flows into safe havens .
But stronger real rates (higher yields globally) can weigh on gold, since it has no yield.
So the net effect depends on how much market stress arises from carry unwind versus macro conditions.
