Research / BFI Working PaperJan 10, 2022

Policy Uncertainty in Japan

Elif C. Arbatli, Steven J. Davis, Arata Ito, Naoko Miake

We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards, building on 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. It 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, the deferral of a consumption tax hike, and the onset of the COVID-19 pandemic. 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. 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 reducing policy uncertainty.

Additional Materials

More Research From These Scholars

BFI Working Paper Aug 1, 2022

State-Level Economic Policy Uncertainty

Scott R. Baker, Steven J. Davis, Jeffrey A. Levy
Topics:  COVID-19
BFI Working Paper Oct 9, 2020

Elections, Political Polarization, and Economic Uncertainty

Scott R. Baker, Aniket Baksy, Nicholas Bloom, Steven J. Davis, Jonathan Rodden
Topics:  Uncategorized
BFI Working Paper Jun 25, 2020

COVID-19 Is Also a Reallocation Shock

Jose Maria Barrero, Nick Bloom, Steven J. Davis
Topics:  COVID-19