The Effect of Economic Regimes on the Relation between Term Structure and Real Activity in Japan

Journal of Economics and Business, Vol. 49, No. 4 (1997)

Posted: 18 Dec 1997

See all articles by Kenneth Kim

Kenneth Kim

Tongji University - School of Economics and Management; SUNY at Buffalo - School of Management

Piman Limpaphayom

Sasin GIBA of Chulalongkorn University

Abstract

Note: This is a description of the paper, not the abstract. Previous research finds that the Japanese term structure of interest rates, as defined by the long-term interest rate minus the short-term interest rate, fails to predict future Japanese economic activity, as defined by changes in GDP. The failure to find a relationship between the two variables is surprising because in almost all other developed economies, a positive relationship is prevalent. Our paper makes two key contributions to the literature. First, we offer an explanation for the inability of prior research to find a positive relationship between these two variables. Specifically, we describe the existence of two distinct economic regimes that have existed in Japan's recent history. During the period from 1975 to 1983, Japanese authorities tightly regulated interest rates and restricted financial market activities. In contrast, the period from 1984 to 1991 represents a time of financial market liberalization. Therefore, we contend that the term structure contains un-informative information for predicting economic activity in the first period, but that the market forces that were allowed to prevail in the latter period should permit the well known positive relationship between these two variables to persist. Overall, we do find a positive relationship between the term structure and economic activity in the latter period of our study, while no significant relationship emerges from the first period. These findings are consistent with our hypothesis. Finally, the second main contribution of our paper is that we employ a generalized method of moments (GMM) methodology to conduct our study. This methodology represents an improvement over prior term structure studies.

JEL Classification: E42, E43

Suggested Citation

Kim, Kenneth A. and Limpaphayom, Piman, The Effect of Economic Regimes on the Relation between Term Structure and Real Activity in Japan. Journal of Economics and Business, Vol. 49, No. 4 (1997), Available at SSRN: https://ssrn.com/abstract=43281

Kenneth A. Kim (Contact Author)

Tongji University - School of Economics and Management ( email )

Siping Road 1500
Shanghai, Shanghai 200092
China

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

Piman Limpaphayom

Sasin GIBA of Chulalongkorn University ( email )

Chula 12, Phyathai Road
Bangkok, 10330
Thailand
662 2184058 (Phone)
662 2153797 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
620
PlumX Metrics