TOKYO—Japan’s two-month experiment with negative interest rates is producing some unexpected results.

Trading has withered in Japan’s money markets, where big banks and others usually park their excess cash hoping to receive some interest—despite predictions from the Bank of Japan that its latest easing of monetary policy would spark more activity. And there has been a rush in demand for Japanese government bonds even as many yields went below zero.

Instead of falling, the yen has surged to 18-month highs against the U.S. dollar.

Still, Japan’s central-bank governor, Haruhiko Kuroda, who was in New York Wednesday, said the Bank of Japan is ready to expand its bond-buying program and cut interest rates further into negative territory as it attempts to bolster economic growth. The BOJ “will not hesitate to take additional easing measures in terms of…quantity, quality and the interest rate if it is judged necessary,” he said.

Participants in the Japanese markets have less conviction than Mr. Kuroda. In interviews, they describe a banking and finance system that is increasingly scrambled by negative rates and their consequences.