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An empirical analysis of information in the yield spread on future recessions in Japan

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  • Masashi Hasegawa
  • Yuichi Fukuta

Abstract

This article examines whether the yield spread contains information on the likelihood of future economic recessions using a probit model by taking the stability of the relationship between the yield spread and future recessions into account. We also compare the accuracy of information in the yield spread with stock returns and money supply. We find the following results in this article. First, a structural change in the relationship between the yield spread and future recessions occur at the end of 1996. Second, whereas the Japanese yield spread contains more precise information on future recessions than stock returns and nominal money supply before the structural break, we cannot predict future recessions using the yield spread after the break. Third, the money supply does not forecast future recessions for the entire sample period.

Suggested Citation

  • Masashi Hasegawa & Yuichi Fukuta, 2011. "An empirical analysis of information in the yield spread on future recessions in Japan," Applied Economics, Taylor & Francis Journals, vol. 43(15), pages 1865-1881.
    • Handle: RePEc:taf:applec:v:43:y:2011:i:15:p:1865-1881
    DOI: 10.1080/00036840902780136
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    3. Mei-Chih Wang & Pao-Lan Kuo & Chan-Sheng Chen & Chien-Liang Chiu & Tsangyao Chang, 2020. "Yield Spread and Economic Policy Uncertainty: Evidence from Japan," Sustainability, MDPI, vol. 12(10), pages 1-14, May.
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    5. Goodness C. Aye & Christina Christou & Luis A. Gil‐Alana & Rangan Gupta, 2019. "Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty," Journal of International Development, John Wiley & Sons, Ltd., vol. 31(1), pages 101-116, January.
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    7. Hansen, Anne Lundgaard, 2024. "Predicting recessions using VIX–yield curve cycles," International Journal of Forecasting, Elsevier, vol. 40(1), pages 409-422.

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