New Financial Activity Indexes: Early Warning System for Financial Imbalances in Japan

This paper describes Financial Activity Indexes (FAIXs), early warning system for financial imbalances in Japan. We introduced the first version of FAIXs in 2012 and revise FAIXs this time. First, we sort the candidate financial indicators into 14 categories. Second, in each category, we examine the usefulness of candidate indicators from two perspectives: (a) whether the indicator can detect the overheating of financial activities in the Japan's Heisei bubble period, which occurred around the late 1980s and had a major impact on Japan's economy and financial activities; and (b) whether the indicator successfully minimizes various statistical errors involved in forecasting future events. In the examination, multiple possibilities are explored with respect to methods used for extracting trends from indicators and thresholds employed for assessing that the deviation of an indicator from its trend constitutes overheating. As a result of choosing the one indicator considered most useful in each category, two of the ten financial indicators comprising the existing FAIXs are abandoned, one is retained, three are revised in terms of trend extraction methods, and four are revised in terms of data processing methods. The 14 indicators, including these eight and six newly selected, now constitute the new FAIXs.