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The Yield Spread as a Predictor of Japanese Recessions

Author

Listed:
  • Hideaki Hirata

    (Bank of Japan)

  • Kazuo Ueda

    (University of Tokyo)

Abstract
Economists have used various financial economic indicators to forecast economic activity. For example, the information contained in the term structure of interest rates has long been regarded as useful for predicting future economic activity. And recently, this topic has received renewed attention as a result of the increasing importance of bond markets behavior for monetary policy and real economic activity in developed economies. Estrella and Mishkin (1996a, b) have found that the yield spread the difference between long-term and short-term interest rates contains useful information for predicting recessions in the U.S. economy by employing the Probit type estimation. They have also found that the yield spread outperforms the stock prices and other leading economic indicators in predicting recessions over forecasting horizons longer than a quarter. In this article, we apply the Estrella-Mishkin analysis to the Japanese economy. The results are somewhat tentative, given the relatively short duration of the period of free interest rate movements, that is, the period since the late 1970s. Nonetheless we find that (1) The yield spread does predict Japanese recessions, based on the Probit model. (2) Other financial variables also predict recessions. The monetary aggregates predict recessions well, but they are also close to a coincident indicator. The stock price is a leading indicator of real economic activity, but is a noisy indicator. Among the three, the yield spread seems to be the best leading indicator of recessions. On the other hand, (3) The predictive power of the yield spread in the Japanese financial markets, however, is not so strong as that in the U. S. markets. For example, in simple OLS regressions of indicators of economic activity on the yield spread, the yield spread is insignificant at a quarterly frequency, though it is significant at a monthly frequency. We suspect that the result reflect the short duration of the sample period and that they may w
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Hideaki Hirata & Kazuo Ueda, 1998. "The Yield Spread as a Predictor of Japanese Recessions," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    • Handle: RePEc:boj:bojwps:98-e-3r
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    Cited by:

    1. Fornari, Fabio & Lemke, Wolfgang, 2010. "Predicting recession probabilities with financial variables over multiple horizons," Working Paper Series 1255, European Central Bank.
    2. Ryuzo Miyao, 2005. "Use Of The Money Supply In The Conduct Of Japan'S Monetary Policy: Re‐Examining The Time‐Series Evidence," The Japanese Economic Review, Japanese Economic Association, vol. 56(2), pages 165-187, June.
    3. Shinobu Nakagawa & Naoto Osawa, 2000. "Financial Market and Macroeconomic Volatility - Relationships and Some Puzzles -," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    4. Bauer, Rob & Derwall, Jeroen & Molenaar, Roderick, 2004. "The real-time predictability of the size and value premium in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 12(5), pages 503-523, November.
    5. Nakaota, Hiroshi & Fukuta, Yuichi, 2013. "The leading indicator property of the term spread and the monetary policy factors in Japan," Japan and the World Economy, Elsevier, vol. 28(C), pages 85-98.
    6. Mei-Chih Wang & Pao-Lan Kuo & Chan-Sheng Chen & Chien-Liang Chiu & Tsangyao Chang, 2020. "Yield Spread and Economic Policy Uncertainty: Evidence from Japan," Sustainability, MDPI, vol. 12(10), pages 1-14, May.
    7. Hiroshi Nakaota & Yuichi Fukuta, 2013. "The Leading Indicator Property of the Term Spread and the Monetary Policy Factors in Japan," Discussion Papers in Economics and Business 13-09-Rev, Osaka University, Graduate School of Economics.
    8. Masashi Hasegawa & Yuichi Fukuta, 2011. "An empirical analysis of information in the yield spread on future recessions in Japan," Applied Economics, Taylor & Francis Journals, vol. 43(15), pages 1865-1881.

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