The term structure of credit spreads and business cycle in Japan

Vol: 
03/2016
Author name: 
Tatsuyoshi Okimoto
Sumiko Takaoka
Year: 
2016
Month: 
May
Abstract: 

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 with an A or BBB rating has more useful information than the government bond yield curve for predicting the business cycle in Japan. However, our results indicate that the increase in the BBB-rated credit spread is associated with future economic growth, 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 in Japan regardless of the economic state.

Updated:  23 June 2017/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Services Team