Policy Uncertainty in Japan

By Elif C Arbatli Saxegaard, Steven J Davis, Arata Ito, Naoko Miake, Ikuo Saito

May 30, 2017

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Elif C Arbatli Saxegaard, Steven J Davis, Arata Ito, Naoko Miake, and Ikuo Saito. Policy Uncertainty in Japan, (USA: International Monetary Fund, 2017) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards building on the approach of Baker, Bloom and Davis (2016). Each index reflects the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters and uncertainty. Our overall EPU index co-varies positively with implied volatilities for Japanese equities, exchange rates and interest rates and with a survey-based measure of political uncertainty. The EPU index rises around contested national elections and major leadership transitions in Japan, during the Asian Financial Crisis and in reaction to the Lehman Brothers failure, U.S. debt downgrade in 2011, Brexit referendum, and Japan’s recent decision to defer a consumption tax hike. Our uncertainty indices for fiscal, monetary, trade and exchange rate policy co-vary positively but also display distinct dynamics. VAR models imply that upward EPU innovations foreshadow deteriorations in Japan’s macroeconomic performance, as reflected by impulse response functions for investment, employment and output. Our study adds to evidence that credible policy plans and strong policy frameworks can favorably influence macroeconomic performance by, in part, reducing policy uncertainty.

Subject: Exchange rate policy, Financial crises, Fiscal policy, Foreign exchange, Global financial crisis of 2008-2009, Public debt, Trade policy

Keywords: Aggregate investment, EPU innovation, Europe, Exchange rate, Exchange rate policy, Fiscal policy index, Global, Global financial crisis of 2008-2009, Japan, Japan EPU index, Policy uncertainty, Uncertainty index, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/128
Stock No:

WPIEA2017128
ISBN:

9781484300671
ISSN:

1018-5941

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