TY - JOUR
T1 - The term structure of credit spreads and business cycle in Japan
AU - Okimoto, Tatsuyoshi
AU - Takaoka, Sumiko
PY - 2017
Y1 - 2017
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.
U2 - 10.1016/j.jjie.2017.06.001
DO - 10.1016/j.jjie.2017.06.001
M3 - Article
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 -