Yield Spread and Economic Policy Uncertainty: Evidence from Japan

Abstract

In this paper, we adopt the nonlinear autoregressive distributed lags (NARDL) model extended by Shin et al. (2014) to investigate the relationship between the treasury yield spread and economic policy uncertainty (EPU) in Japan. This model helps us to explore the short- and long-run asymmetric reactions of explained variables through positive and negative partial sum decompositions of changes in the explanatory variable(s). In our research, the testing of the NARDL specification reveals the existence of a significant long-run asymmetric equilibrium between the yield spread and EPU in Japan. On the other hand, we find a significant positive nexus between the treasury yield spread and EPU reduction in the long run. We speculate that because of low inflation, a poor economic outlook and the low interest rate environment since 1990, financial agents are markedly sensitive to negative shocks resulting from EPU. This means that when facing a good economy, bond agents are quick to sell, especially with higher-risk long-term interest rate bonds. Meanwhile, because the Bank of Japan announced the Stock Purchasing Plan in October 2002 and from the point view of portfolio management, while the influence of a positive economic outlook dominates the negative outlook, flight from quality has no role in asset portfolio adjustment. The empirical implications are that the long history of unconventional monetary policy supports the demand for both bonds and stock markets. When taking the stock market into consideration, the correlations between the yield spread, EPU and stock market capture the full wealth effects of the low interest rate environment in Japan.

Examining the Asymmetric Nexus between Energy Consumption, Technological Innovation, and Economic Growth; Does Energy Consumption and Technology Boost Economic Development?

“…These studies also used the Granger causality test. The research found a bidirectional causality of energy use in the economic growth of China [11]. For eastern and western China as a whole, there is no long-term causal connection between energy use and economic development.…”

“…Distribution of the residuals was usually carried out after the Jarque-Bera statistics dismissed the null hypothesis. The empirical framework of this study can be articulated as follows: The NARDL model can be used to derive the asymmetries of both long-and short-run dynamics and variables included in the NARDL model [11,21,37,38]. The NARDL-bound check can also have reliable estimates in the presence of a limited sample size [17].…”

“…Some experts claim that technological innovations can increase energy efficiency and thus 2 of 17 reduce energy use [10]. Technological innovation is providing new and better ways to manufacture goods that can contribute to the growth of the economy [11]. However, technological innovation only improves the productivity of labor, capital, and other resources [4].…”

Monetary policy document analysis for prediction of monetary policy board decision

“…These studies mainly focused on analyzing monetary policy and interest rates using traditional economic analysis methods, however recently, data mining techniques have been used to analyze monetary policy and predict interest rates [32] , [38] . Kim and Noh [23] used a neural network (NN) to predict the interest rates of both Korea and the United States (US) and to establish whether they have a significant impact on a country's economic network and financial markets.…”

Sources of Economic Policy Uncertainty in Nigeria: Implications for Africa

“…In the absence of an economic policy uncertainty index for Nigeria, this study identifies the sources of economic policy uncertainty in Nigeria. Secondly, this study contributes to the literature that examine the consequences of economic policy uncertainty in small open economies (Luk et al, 2020;Wang et al, 2020;Yang et al, 2020;Ozili, 2021b). This paper is organized as follows.…”