TY - JOUR
T1 - The term structure of credit spreads and business cycle in Japan
AU - Okimoto, Tatsuyoshi
AU - Takaoka, Sumiko
N1 - Funding Information:
The authors would like to express their thanks to Takeshi Kobayashi and participants at the 2016 Japanese Economic Association Autumn Meeting for their helpful comments. We also thank two anonymous referees and Shin-ichi Fukuda (the editor) for valuable comments that improved the article. The first author thanks the financial support by a grant-in-aid from Japan Center for Economic Research. The second author gratefully acknowledges the financial assistance provided by the Japan Society for the Promotion of Science (JSPS) KAKENHI Grant Number JP25705010.
Publisher Copyright:
© 2017
PY - 2017/9
Y1 - 2017/9
N2 - This paper investigates the usefulness of the term structure of credit spreads to predict the business cycle in Japan. Our analyses provide clear evidence that the term structure of credit spreads has more predictive power than the government bond yield. Specifically, the paper shows that the credit spread curve of medium-grade corporate bonds has more useful information than the government bond yield curve for predicting the business cycle. However, our results indicate that the increase in the BBB-rated credit spread is associated with future economic expansion, contradicting the theoretical prediction in the existing literature. Our Markov-switching analysis demonstrates that this peculiar relationship holds only during the global financial crisis regime, and the 1-year government bond yield and the term spread of A-rated credit spread information have significant predictive power for the business cycle, regardless of the economic state.
AB - This paper investigates the usefulness of the term structure of credit spreads to predict the business cycle in Japan. Our analyses provide clear evidence that the term structure of credit spreads has more predictive power than the government bond yield. Specifically, the paper shows that the credit spread curve of medium-grade corporate bonds has more useful information than the government bond yield curve for predicting the business cycle. However, our results indicate that the increase in the BBB-rated credit spread is associated with future economic expansion, contradicting the theoretical prediction in the existing literature. Our Markov-switching analysis demonstrates that this peculiar relationship holds only during the global financial crisis regime, and the 1-year government bond yield and the term spread of A-rated credit spread information have significant predictive power for the business cycle, regardless of the economic state.
KW - Business cycle
KW - Corporate bond spreads
KW - Government bond yields
KW - Markov-switching model
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U2 - 10.1016/j.jjie.2017.06.001
DO - 10.1016/j.jjie.2017.06.001
M3 - Article
AN - SCOPUS:85020314310
SN - 0889-1583
VL - 45
SP - 27
EP - 36
JO - Journal of The Japanese and International Economies
JF - Journal of The Japanese and International Economies
ER -