The following is a translated version of the Bank of Japan’s statement called "Understand Negative Rates in 5 Minutes."
The statement is a Socratic dialogue with a hypothetical questioner, released last week in Japanese.

Q: Is it really true you’re doing negative rates?
A: The BOJ has been doing large scale monetary easing for the last three years. It’s called "Quantitative and Qualitative Easing" or "Easing on a Different Scale." In January, we started a negative interest rate to increase the power of this.

Q: Are the savings I keep in the bank going to shrink?
A: The negative rate only applies to some money that banks keep at the BOJ. Personal savings are a different matter.

Q: So interest rates on private savings aren’t going negative?
A: In Europe, negative rates are much lower than the BOJ’s, but the interest paid on private savings hasn’t gone negative.

Q: Even if they don’t go negative, they’re still going down a bit, right?
A: The interest rate on a regular account was 0.02% and is now 0.001%.

Q: Isn’t this bad for consumption?
A: If you’d put 1 million yen in the bank for a year, you would have got 200 yen in interest. Now, it’s 10 yen. This isn’t enough to damage consumption, now, is it?

Q: You would originally have only got 200 yen? That’s pretty harsh, isn’t it?
A: Yes, it is. The interest paid on 1 million yen fell below 1,000 yen in 1999. Interest on savings has been very low for more than 15 years. But that was because we had "deflation"

Q: What’s deflation?
A: That is where prices fall every year. Japan has had deflation for 15 years.

Q: What’s bad about falling prices?
A: Because of deflation, prices didn’t rise, company sales didn’t grow, and so wages didn’t rise either. In the three years the BOJ has been doing "Easing on a Different Scale," companies have really starting earning a lot, and the spring base wage increase has started again. If deflation disappears, wages will start rising again each year.

Q: Does deflation mean that interest rates are low too?
A: If rates rise during deflation or a slump, it will further damage the economy, and wages and prices would drop more. Even during deflation, Japan didn’t see a massive increase in the unemployed. That’s because rates were low.

Q: But if rates were higher people would spend the money they get from interest.
A: Most of people’s income is from wages. Even if rates rose and increased interest income, it wouldn’t matter as the economy would get worse, wages would fall, and people would lose their jobs.

Q: So what should we do?
A: The only thing is to totally escape deflation. To do that, people have to put up with low rates now, improve the economy, and raise prices a little more.

Q: But did you have to go as far as negative rates in the easing on a different scale?
A: Deflation had continued for 15 years, and everyone thought it was normal. To change that, we had to take bold actions.

Q: How effective will negative rates be?
A: After we did the negative rate, home loan interest rates fell, so you can now get a fixed 10-year mortgage for less than 1 percent. Bank’s home-loan advice centers have apparently been very busy. And the rate that companies borrow at has also fallen. This will be good for people when they build a house, or companies when they build factories or shops.

Q: Won’t banks lose money? Is that OK?
A: Indeed, bank’s profits will shrink as the interest they charge on loans will fall even as the interest they pay on savings won’t be negative.
But it’ll be fine. Japan’s financial institutions are very healthy and weren’t damaged by the Lehman collapse. They got lots of profits last year. The BOJ set the negative rate to only apply to some of the money in their accounts, so they won’t be inconvenienced much.

Q: Can we really get out of deflation with this?
A: Maybe everyone has forgotten, but three years ago prices were negative. Now, if you exclude the price of gasoline which is falling worldwide, prices are rising more than 1 percent. It’s just a little further until we’re at the point of "No Return to Deflation." "Easing on a Different Scale" has really worked in these three years. This will strengthen that. We will escape from deflation.

Q: Isn’t it enough that prices are rising more than 1 percent?
A: The economy has good times and bad times, and so we need a buffer so that we don’t quickly drop back into deflation. Planes don’t fly just above the ground, do they? So the BOJ is aiming at gradual price rises of 2 percent. 2 percent is the global standard, the same as in the U.S. and in Europe.

Q: If we escape deflation will interest on savings rise?
A: If we totally escape deflation, Japan’s economy will improve and get better. Interest rates on savings will also rise. Banks will be able to raise rates on loans as well, so they’ll be fine. This is for everyone.

Q: I guess I get it now, but I got nervous when I heard ‘negative rates.’
A: Maybe the word negative had negative connotations. In addition, global markets are currently unstable, with worrying news like "Stocks Fell in New York" or "Capital is Fleeing China." Maybe it added to the feeling.
However, Japan’s companies are reporting record profits overall, and the economy is going in a good direction. In addition, this policy is very powerful. It will have a clear "positive" effects and the situation will be brighter.

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