Policy uncertainty in Japan

We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards, building on Baker et al. (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 vol-atilities for Japanese equities, exchange rates, and interest rates and with a survey-based measure of political uncertainty. It 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 ref-erendum, the deferral of a consumption tax hike, and the onset of the COVID-19 pandemic. 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. 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 in-fluence macroeconomic performance by reducing policy uncertainty.

Automated summary

This study develops economic policy uncertainty indices for Japan and finds that they are positively correlated with implied volatilities for Japanese equities, exchange rates, interest rates, and political uncertainty. The indices rise around important events such as national elections, financial crises, and international incidents. The study also shows that uncertainty indices for fiscal, monetary, trade, and exchange rate policy exhibit distinct dynamics.