With the Bank of Japan’s decision to return its key policy rate to zero or lower, the nearly 12-year experiment with negative interest rates has come to an end.

Negative interest rates were one of the most contentious unconventional policies implemented by central banks during the last fifteen years. The advantages and risks of these policies were not clearly defined.

To get economies out of their slump or inflation up to central banks’ 2% targets, negative rates weren’t sufficient on their own. That was only made possible by the COVID-19 outbreak and the conflict in Ukraine.

Even though negative rates weren’t a magic bullet, they did appear to assist somewhat. Inflation in Japan resumed after a hiatus caused by negative interest rates, which pushed down the yen and boosted import prices. The banking systems were not as unstable as anticipated, despite a few negative consequences.

Therefore, central bankers will likely keep negative rates on hand in the event of a comparable emergency—maybe even as a threat that is never used—even though they are retiring them for the time being.

Former member of the Bank of Japan policy board and supporter of negative interest rates Yutaka Harada stated that the option to return to negative rates is always there in the event that market conditions require it.

Following the 2008 financial crisis, which sent many developed economies into a deep freeze sometimes referred to as secular stagnation, negative interest rates, which were previously only considered theoretically, became a realistic possibility. Central banks still had a hard time producing what they considered a reasonable amount of inflation even after they lowered interest rates to zero.

People who deposit money often might keep it safe by putting it under a mattress. However, central bankers came to the realization that commercial banks, who were the depositors, lacked the space to conceal mattresses large enough to conceal billions of euros or kroner. Instead of collecting income, those depositor banks could be forced to pay it.

After Denmark’s central bank implemented negative interest rates on commercial bank deposits in 2012, the ECB in 2014, the Bank of Japan in early 2016, Sweden, and Switzerland all did the same.

Theoretically, a negative-rate policy would stimulate the economy and inflation in the same ways as traditional interest rate cuts do, says the International Monetary Fund. Businesses will find it easier to borrow and spend thanks to the policy’s reduction in interest rates. All things considered, that ought to stimulate demand and set off inflation.

In reality, how well did the hypothesis hold up? It was hard to tell if there were any consequences. Negative interest rates did little to improve the dull economies of Japan and Europe, which both had inflation rates below their targets.

Yes, there is some extra credit extension, according to some research. Central bank expert Hugo van Buggenum of Zurich’s KOF Swiss Economic Institute remarked that some research have shown less.

Economist Izumi Devalier of the Bank of America in Tokyo found that countries suffering from low demand and pessimism would not be substantially affected by a modestly negative rate—minus 0.1% in Japan’s instance—since it was not distinct enough from zero. She argued that the economic aspect was more crucial, citing massive government spending programs that boosted economy in the early stages of the pandemic as an example.

Van Buggenum argued in a working paper for the Federal Reserve last autumn that negative rates were based on incorrect theory. Central banks’ negative interest rates damage the financial sector, the authors observed, because commercial banks have a hard time charging negative interest on deposits due to regulations or conventions.

The unexpected impact of negative rates on public psyche was a major disappointment. All the news stories in Japan that included the word “minus” gave the idea that people’s wallets were going to take a beating.

Monetary policy doesn’t pique the interest of the ordinary person. On the other hand, when interest rates were negative, daytime television hosts started raving about how hot safes were selling. According to Harada, a former board member of the Bank of Japan, it wasn’t good. There was a climate where financial institutions felt comfortable opposing since the public was against it.

Nevertheless, in 2021, the International Monetary Fund stated that the negative-rate strategy “has likely supported growth.” Some central bankers have argued that negative interest rates demonstrate a commitment to stimulating the economy by demonstrating that there is no floor.

Although negative interest rates were never implemented by the Federal Reserve, former Chairman Ben Bernanke suggested in a blog post from 2020 that “the Fed should also consider maintaining constructive ambiguity about the future use” of the strategy.

At first, the yen was unaffected by Japan’s negative interest rates since other central banks also had zero or negative rates. However, the Federal Reserve began raising interest rates in 2022, and the ECB and other European central banks quickly followed suit, ending their negative-rate programs.

The negative rate in Japan caused investors to flee to safer havens like the US dollar and the Euro, sending the yen to levels not seen in three decades.

Japanese food and gasoline importers increased prices and passed the savings on to customers. Japanese exporters like Toyota were able to increase their yen holdings from their US dollar profits, making their made-in-Japan products more competitive on international markets.

Pay hikes of more than 5% have been offered by numerous Japanese corporations this year, thanks to their hefty earnings. There is inflation of more than 2%, which is driven up by the cost of imports. That was sufficient to warrant the Bank of Japan ending its policy of negative interest rates.

At least in Japan and Europe, it may be a while before it returns. Only China’s economy shows symptoms of secular stagnation, such a burst real estate bubble and a persistent demand gap, among the world’s most important economies. However, the allure of negative rates as a last-ditch measure will persist anytime stagnation reappears.