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Toward a Guidepost for Quantitative Tightening :The Case of the Bank of Japan

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  • SHIRATSUKA, Shigenori

Abstract

An exit strategy from large-scale unconventional monetary policy requires central banks to adjust their policy interest rates and the size of their balance sheet. Adjustments of policy interest rates are carried out using neutral interest rates as a guidepost, even in the presence of measurement uncertainty. In contrast, adjustments of balance sheet size, or quantitative tightening (QT), are implemented through trial and error without any standardized guideposts. In this paper, I will develop a guidepost for the QT process in Japan. To that end, I will examine the long-term level of the balance sheet size of the Bank of Japan (BOJ), based on the estimation results for the nonlinear shape of the reserve demand curve. I will then carry out a simulation analysis of the transition path of the BOJ’s holdings of Japanese Government Bonds (JGBs). I will also address concerns over the boundary between fiscal financing and monetary policy by proposing the “extended banknote rules,” both in the long term and in the transition.

Suggested Citation

  • SHIRATSUKA, Shigenori, 2025. "Toward a Guidepost for Quantitative Tightening :The Case of the Bank of Japan," Discussion paper series HIAS-E-146, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    • Handle: RePEc:hit:hiasdp:hias-e-146
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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