Policy Uncertainty in Japan

45 Pages Posted: 24 May 2017

See all articles by Elif C. Arbatli

Elif C. Arbatli

International Monetary Fund (IMF)

Steven J. Davis

University of Chicago; National Bureau of Economic Research (NBER)

Arata Ito

Research Institute of Economy, Trade and Industry (RIETI)

Naoko Miake

International Monetary Fund (IMF)

Ikuo Saito

International Monetary Fund (IMF)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2017

Abstract

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.

Suggested Citation

Arbatli, Elif C. and Davis, Steven J. and Ito, Arata and Miake, Naoko and Saito, Ikuo, Policy Uncertainty in Japan (May 2017). NBER Working Paper No. w23411. Available at SSRN: https://ssrn.com/abstract=2971788

Elif C. Arbatli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Steven J. Davis

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7312 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Arata Ito

Research Institute of Economy, Trade and Industry (RIETI) ( email )

1-3-1 Kasumigaseki
Chiyoda-ku
Tokyo 100-8901
Japan

Naoko Miake

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ikuo Saito

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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