Fiscal Cost to Exit Quantitative Easing: The Case of Japan

This paper simulates the cash flows and balance sheets of the Bank of Japan (BoJ) before and after exiting from Quantitative and Qualitative Monetary Easing (QQE) under various scenarios. The simulations show that the BoJ will record significant accounting losses after exiting QQE. These losses are fiscal costs for the consolidated Japanese government as they represent increased interest expenses to the public and will arise because the BoJ will acquire a large amount of Japanese government bonds at very low interest rates during QQE, whose interest payments will then be insufficient to cover interest expenses on excess reserves after exiting QQE. Moreover, any cumulative accounting losses will ensure the BoJ's net asset position remains negative for a sustained period of time. We also find that the BoJ's accounting losses will increase with the duration of QQE and the interest rate elasticity of banknote demand, and decrease if the BoJ conducts tapering following the ending of QQE. Finally, the effect of tapering will be significantly stronger if there is no safety channel for the long-term interest rate.