Objective: Long hospital-stay of psychiatric patients is recognized as a problem in Japan compared with the western countries. In order to address this issue, the Japanese government initiated a reform plan in 2004 to make the beds largely downsized in the next decade, and raised the official fees of hospitalization to make a shift from out-patient to in-patient care. The aim of our study is to estimate how such a shift can affect and project the total costs of psychiatric care in a hospital when the hospital complies with the government new plan. Methods: A system dynamics model for computing simulation was developed to estimate the total medical costs per hospital over a three-year period, employing the data from the published literature such as The 2006 Comprehensive Survey Report of the Japanese Association of Psychiatric Hospitals, etc. The model consists of four compartments for one out-patient care unit and three types of in-patient units such as short-term, mid-term and long-term care. The flows of patients and the relevant costs were analyzed and figured out alongside the compartments in the model. Hypothetical scenarios were simulated, assuming different rates of in- and out-patients flows. Results: The simulated estimation resulted in the highest cost, $27,933,166, of one scenario with maximizing both a discharge rate of long-hospitalized patients and an acquisition rate of new out-patients. On the contrary, the lowest cost, $22,789,521, was identified in another scenario with no acceleration for discharge of long-hospitalized patients and no acquisition of new out-patients. Conclusion: A system dynamics simulation suggested that the government new policy for psychiatric care does not lead to cost-saving in a hospital perspective, but could be cost-increasing against the government intention to control the increasing cost. The evaluation of incremental cost-effectiveness ratio is the next step for further assessment.