Policy Uncertainty in Japan

45 Pages Posted: 24 May 2017 Last revised: 6 Sep 2019

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); Hoover Institution

Arata Ito

Research Institute of Economy, Trade and Industry (RIETI)

Naoko Miake

International Monetary Fund (IMF)

Multiple version iconThere are 3 versions of this paper

Date Written: August 5, 2019

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 deferral of a consumption tax hike. Our uncertainty indices for fiscal, monetary, trade, and exchange rate policy co-vary positively but also display distinct dynamics. For example, our trade policy uncertainty (TPU) index rocketed upwards when the U.S. withdrew from the Trans-Pacific Partnership in January 2017. 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.

Keywords: Policy Uncertainty, Japan, Aggregate Investment

JEL Classification: D80, E20, E52, E62, F13

Suggested Citation

Arbatli, Elif C. and Davis, Steven J. and Ito, Arata and Miake, Naoko, Policy Uncertainty in Japan (August 5, 2019). Becker Friedman Institute for Research in Economics Working Paper No. 2017-09. Available at SSRN: https://ssrn.com/abstract=2972891 or http://dx.doi.org/10.2139/ssrn.2972891

Elif C. Arbatli

International Monetary Fund (IMF) ( email )

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

Steven J. Davis (Contact Author)

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
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Hoover Institution

434 Galvez Mall
Stanford University
Stanford, CA 94305-6010
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773 251 1795 (Phone)

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

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