The Term Structure of Credit Spreads and Business Cycle in Japan

30 Pages Posted: 15 Jun 2016

See all articles by Tatsuyoshi Okimoto

Tatsuyoshi Okimoto

Australian National University

Sumiko Takaoka

Seikei University - Faculty of Economics

Date Written: April 26, 2016

Abstract

This paper investigates the usefulness of the term structure of credit spreads to predict the business cycle in Japan. Our analyses provide clear evidence that the term structure of credit spreads has more predictive power than the government bond yield. Specifically, the paper shows that the credit spread curve of medium-grade corporate bonds with an A or BBB rating has more useful information than the government bond yield curve for predicting the business cycle in Japan. However, our results indicate that the increase in the BBB-rated credit spread is associated with future economic growth, contradicting the theoretical prediction in the existing literature. Our Markov-switching analysis demonstrates that this peculiar relationship holds only during the global financial crisis regime, and the 1-year government bond yield and the term spread of A-rated credit spread information have significant predictive power for the business cycle in Japan regardless of the economic state.

Keywords: Business cycle; corporate bond spreads; government bond yields; Markov-switching model

JEL Classification: E32, E43, E44, G12

Suggested Citation

Okimoto, Tatsuyoshi and Takaoka, Sumiko, The Term Structure of Credit Spreads and Business Cycle in Japan (April 26, 2016). AJRC Working Paper No. 3, May 2016. Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University, Available at SSRN: https://ssrn.com/abstract=2795361 or http://dx.doi.org/10.2139/ssrn.2795361

Tatsuyoshi Okimoto (Contact Author)

Australian National University ( email )

Canberra, Australian Capital Territory 2601
Australia

Sumiko Takaoka

Seikei University - Faculty of Economics ( email )

3-3-1, Kichijoji-Kitamachi, Musasino-shi
Tokyo 180-8633
Japan

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