Short-term Forecasting of the Japanese Economy Using Factor Models

35 Pages Posted: 27 Mar 2012

See all articles by Claudia Godbout

Claudia Godbout

Government of Canada - Bank of Canada

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

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Date Written: March 12, 2012

Abstract

While the usefulness of factor models has been acknowledged over recent years, little attention has been devoted to the forecasting power of these models for the Japanese economy. In this paper, we aim at assessing the relative performance of factor models over different samples, including the recent financial crisis. To do so, we construct factor models to forecast Japanese GDP and its subcomponents, using 38 data series (including daily, monthly and quarterly variables) over the period 1991 to 2010. Overall, we find that factor models perform well at tracking GDP movements and anticipating turning points. For most of the components, we report that factor models yield lower forecasting errors than a simple AR process or an indicator model based on Purchasing Managers' Indicators (PMIs). In line with previous studies, we conclude that the largest improvements in terms of forecasting accuracy are found for more volatile periods, such as the recent financial crisis. However, unlike previous studies, we do not find evident links between the volatility of the components and the relative advantage of using factor models. Finally, we show that adding the PMI index as an independent explanatory variable improves the forecasting properties of the factor models.

Keywords: Japan, forecasting, nowcasting, factor models, mixed frequency

JEL Classification: C50, C53, E37, E47

Suggested Citation

Godbout, Claudia and Lombardi, Marco Jacopo, Short-term Forecasting of the Japanese Economy Using Factor Models (March 12, 2012). ECB Working Paper No. 1428, Available at SSRN: https://ssrn.com/abstract=2020334

Claudia Godbout (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Marco Jacopo Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

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