We report an unusual band gap narrowing in Y3Al5O12 (YAG) insulating oxide after growing YAG single crystals in hydrogen atmosphere. Theory confirms that hydrogen interstitials as well as oxygen vacancies strongly shift the absorption spectrum towards lower energies. Furthermore, hydrogen eliminated all deep and shallow traps in the YAG structure and dramatically modified the optical and scintillation properties of YAG single crystals. We conclude that hydrogen plays a significant role in insulating oxides similar to its role in semiconductors and it may be used to passivate defects and improve exciton dynamics in oxides for optical and scintillation applications.