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.

More Research From These Scholars

BFI Working Paper Jan 16, 2019

Dynamism Diminished: The Role of Housing Markets and Credit Conditions

Steven J. Davis, John Haltiwanger
Topics:  Monetary Policy, Employment & Wages, Fiscal Studies, Economic Mobility & Poverty
BFI Working Paper Mar 25, 2019

Policy News and Stock Market Volatility

Scott R. Baker, Nicholas Bloom, Steven J. Davis, Kyle Kost
Topics:  Financial Markets, Fiscal Studies
BFI Working Paper Jan 1, 2016

Regulatory Complexity and Policy Uncertainty: Headwinds of Our Own Making

Steven J. Davis
Topics:  Financial Markets, Monetary Policy