Fiscal Cost of Quantitative Easing and Negative Interest Rate Policy by the Bank of Japan: Resolution method of a central bank with large negative equity

Author Name FUKAO Mitsuhiro (Faculty Fellow, RIETI)
Creation Date/NO. March 2016 16-J-032
Research Project A Cost-Benefit Analysis of Fiscal Consolidation Measures
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The Bank of Japan (BOJ)'s quantitative and qualitative easing of the monetary policy appears costless on the surface. However, in the long run, the BOJ is likely to incur huge fiscal cost. Since the BOJ is buying a massive amount of long-term Japanese government bonds (JGBs), it will face a large loss from the falling JGB prices once Japan exits from a deflationary environment. The BOJ's negative interest policy in February 2016 will reduce the interest payment on a part of the reserves held by private financial institutions. However, this will be more than offset by the cost from the open market purchase of long-term JGBs with negative yield. In this paper, we will estimate the fiscal cost of the quantitative easing policy. We also discuss the resolution methods of the central bank with permanent negative cash flow.