The Sustainability of the Bank of Japan's Balance Sheet

Abstract

By considering the Bank of Japan's (BoJ) balance sheet, we argue that expansion- ary monetary policy has the potential to cause a central bank to lose its independence from the scal authority as a result of an interest rate shock or in ation scare. We model the evolution of the BoJ's balance sheet as these shocks occur, in order to investigate whether or not assets (at market value) dip beneath interest-bearing lia- bilities/deposits. We determine that at current balance sheet levels, the BoJ is not at risk of a signi cant capital loss problem, should interest rates rise from the zero lower bound. However, if an in ation scare scenario emerges, seigniorage revenues may not cover the capital loss. Finally, we conclude that our analysis is limited by assumptions we have made pertaining to currency demand. If Japanese people sub- stitute currency in a substantial way for interest-bearing cash cards, for example, the severity of the problems we have observed would be ampli ed { via a reduced level of seigniorage revenue. 4