Higher Policy Uncertainty Could Be Bad News for Japan’s Economy
IMF Blog, May 30, 2017
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Bibliographic details
- Authors: Elif C Arbatli, Steven J Davis, Arata Ito
- Published: May 30, 2017
Overview and study design
- Authors: Elif C. Arbatli, Steven J. Davis, Arata Ito
- Date: May 30, 2017
- Scope: Analysis of policy uncertainty in Japan from January 1987 onwards.
- Method: Five indices constructed from frequency of articles containing economy-, policy-, and uncertainty-related terms in four major Japanese newspapers: Yomiuri, Asahi, Mainichi, and Nikkei.
- Indices: overall economic policy uncertainty; fiscal policy uncertainty; monetary policy uncertainty; exchange rate policy uncertainty; trade policy uncertainty.
Key findings on timing and drivers of uncertainty
- The overall index rises around contested national elections and major leadership transitions.
- Peaks in the overall index occurred during:
- the Asian financial crisis;
- the failure of Lehman Brothers in September 2008;
- the resignation of Prime Minister Kan and the US debt-ceiling fight in 2011;
- the Brexit referendum in June 2016;
- the deferral of a hike in Japan’s consumption tax rate.
- Global events contribute materially to Japanese policy uncertainty (examples: Brexit referendum, US presidential election).
Quantitative breakdown of policy-source composition
- Among articles that satisfy the criteria for the overall economic policy uncertainty index:
- 57 percent reference fiscal policy matters.
- 27 percent reference monetary policy.
- 8 percent reference trade policy.
- 3 percent reference exchange rate policy.
- Trade-policy volatility example: a 140 percent jump in the Japan trade policy uncertainty index in 2016 relative to its average in 2014-15.
- Overall change: the Japan economic policy uncertainty index rose by 56 percent in 2016 compared to its average in 2014-15.
Relationship between policy uncertainty and macroeconomic performance
- Evidence indicates that surprise increases in policy uncertainty foreshadow deteriorations in Japan’s macroeconomic performance.
- High policy uncertainty is associated with:
- discouraged investment;
- slowed hiring;
- increased use of part-time workers.
- Mechanisms suggested:
- uncertainty acts as an impulse generating fluctuations;
- uncertainty amplifies and propagates shocks originating elsewhere;
- or both.
Policy implications and recommendations
- Credible plans and clearer communication can reduce policy uncertainty and thereby improve economic performance.
- Specific policy priorities for Japan:
- Establish and communicate credible plans for taxation and spending to restore fiscal credibility (example: postponement of the consumption tax hike initially scheduled for 2015).
- Follow through on structural reforms in product and labor markets.
- Reforms to boost employment of women and the elderly, given Japan’s aging population and the large share of working-age women not in the labor force.
- Clarify the direction of trade policy, in light of diminished US enthusiasm for the Trans-Pacific Partnership.
- Develop a concrete and credible plan to tackle Japan’s long-term fiscal sustainability.
- Improve Bank of Japan communications: better forward guidance and enhancements to the communications framework.
Source: Higher Policy Uncertainty Could Be Bad News for Japan’s Economy — Elif C. Arbatli, Steven J. Davis, Arata Ito (May 30, 2017).
Content in this bundle
- 政策不确定性上升 对日本经济可能是个坏消息
- 政策の不確実性は日本経済の逆風に; イリフ・C・アルバトリ、スティーブン・J・デービス、伊藤 新 Imf ブログ 2017年5月30日掲載
