Australia-Japan Research Centre Working Papers (AJRC)

Permanent URI for this collectionhttps://hdl.handle.net/1885/733738382

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Open Access
Asymmetry in government bond returns
(Crawford School of Public Policy, The Australian National University, 2013-01) Ippei FuijwarA.; Korber, Lena Mareen; Nagakura, Daisuke
Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modelling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.
Open Access
Who participates in corporate income tax consolidation? Evidence from Japan
(Crawford School of Public Policy, The Australian National University, 2013-02) Onji, Kazuki
When a group of affiliated corporations have the option to file a single tax return based on a combined income, what types of groups would take up the option? This study empirically analyses decisions to participate in a single-jurisdiction consolidated tax filing. The data consists of 2,782 Japanese corporate groups headed by publicly-traded corporations observed over 2002-2007. Results indicate higher likelihood of participation among groups characterised by low correlation in returns among group members, high variance in returns, large number of subsidiaries, and losses accumulated in parents. The significant influence of variance and covariance of returns suggests that a consolidation scheme improves the efficiency of corporate income tax through reducing profit shifting.
Open Access
Railroad expansion and entrepreneurship: Evidence from Meiji Japan
(Crawford School of Public Policy, The Australian National University, 2013-02) Tang, John
Railroads in Meiji Japan are credited with facilitating factor mobility as well as access to human and financial capital, but the impact on firms is unclear. Using a newly developed firm-level dataset and a difference-in-differences model that exploits the temporal and spatial variation of railroad expansion, I assess the relationship between railways and firm activity across Japan. Results indicate that railroad expansion corresponded with increased firm activity, particularly in manufacturing, although this effect is mitigated in less populous regions. These findings are consistent with industrial agglomeration in areas with larger markets and earlier development among both new and existing establishments.
Open Access
Global liquidity trap
(Crawford School of Public Policy, The Australian National University, 2013-02) Fujiwara, Ippei; Nakajima, Tomoyuki; Sudo, Nao; Teranishi, Yuki
How should monetary policy respond to a global liquidity trap,"? where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterise optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs very well in this respect.
Open Access
Purchasing power parity and the Taylor rule
(Crawford School of Public Policy, The Australian National University, 2013-03) Kim, Hyeongwoo; Fujiwara, Ippei; Hansen, Bruce E.; Ogaki, Masao
It is well-known that there is a large degree of uncertainty around Rogoff's (1996) consensus half-life of the real exchange rate. To obtain a more efficient estimator, we develop a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. Further, we propose a median unbiased estimator for the system method based on the generalized method of moments with nonparametric grid bootstrap confidence intervals. Applying the method to real exchange rates of 18 developed countries against the US dollar, we find that most half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals. Our Monte Carlo simulation results are consistent with an interpretation of these results that the true half-lives are short but long half-life estimates from single equation methods are caused by the high degree of uncertainty of these methods.
Open Access
Financial stability in open economies
(Crawford School of Public Policy, The Australian National University, 2013-04) Fujiwara, Ippei; Teranishi, Yuki
Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in the home country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination.
Open Access
Policy regime change against chronic deflation? Policy option under long-term liquidity trap
(Crawford School of Public Policy, The Australian National University, 2014-02) Fujiwara, Ippei; Nakazono, Yoshiyuki; Ueda, Kozo
The policy package known as Abenomics appears to have influenced the Japanese economy drastically, in particular, in the financial markets. In this paper, focusing on the aggressive monetary easing of Abenomics, the first arrow, we evaluate its role in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, such as that which Japan has been suffering over the last two decades, policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthlysurvey data shows that monetary policy reaction to inflation rates has been in a declining trend since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Consequently, no sizable difference in perceptions has been found before and after the introduction of Abenomics. Estimated changes in perceptions are not abrupt enough to satisfy "?Sargent's (1982) criteria for regime change"? termed by Eggertsson (2008). This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?
Open Access
Policy Regime Change against Chronic Deflation? Policy option under long-term liquidity trap
(Crawford School of Public Policy, The Australian National University, 2014-02) Fujiwara, Ippei; Nakazono, Yoshiyuki; Ueda, Kozo
The policy package known as Abenomics appears to have influenced the Japanese economy drastically, in particular, in the financial markets. In this paper, focusing on the aggressive monetary easing of Abenomics, the first arrow, we evaluate its role in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, such as that which Japan has been suffering over the last two decades, policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthly survey data shows that monetary policy reaction to inflation rates has been in a declining trend since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Consequently, no sizable difference in perceptions has been found before and after the introduction of Abenomics. Estimated changes in perceptions are not abrupt enough to satisfy "?Sargent's (1982) criteria for regime change"? termed by Eggertsson (2008). This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?
Open Access
Agglomeration effects of inter-firm backward and forward linkages: evidence from Japanese manufacturing investment in China
(Crawford School of Public Policy, The Australian National University, 2014-02) Nakajima, Kentaro; Matsuura, Toshiyuki; Yamashita, Nobuaki
This paper examines the agglomeration effects of multinational firms on the location decisions of first-time Japanese manufacturing investors in China for the period 1995-2007. This is accomplished by exploiting newly constructed measures of inter-firm backward and forward linkages formed in a home country. The conditional and mixed logit estimates reveal that agglomeration by first-tier suppliers and customers draws subsequent investment into a location. However, such agglomeration effects are not pervasive and do not extend to the second and third tiers. Instead, we find that agglomeration by third-tier suppliers generates a countervailing force, making a location relatively unattractive.
Open Access
Asymmetric Increasing Trends in Dependence in International Equity Markets?
(Crawford School of Public Policy, The Australian National University, 2014-03) Okimoto, Tatsuyoshi
This paper investigates asymmetric increasing trends in dependence in major international equity markets. To this end, we develop a multiple-regime smooth-transition copula GARCH model and address several important questions, including the number of regimes and the existence of increasing asymmetric trends in dependence. Our results suggest that two or three regimes are sufficient for describing the dependence trends in international equity markets over the last 35 years with significant asymmetric increases. In addition, the implied time-series of three dependence measures show a wide variety of dynamics, demonstrating the usefulness of our framework to describe asymmetric increasing dependence trends. Finally, we evaluate the economic significance of our empirical finding based on the 99% value at risk and expected shortfall. Our result indicates that both risk measures have increased approximately 20% over the last 35 years in major equity markets.
Open Access
What Types of Companies Have Female and Foreign Directors?
(Crawford School of Public Policy, The Australian National University, 2014-03) Morikawa, Masayuki
This paper analyzes the determinants of the presence and the number of female and foreign directors among Japanese companies. First, listed and long-established companies, subsidiaries, and unionized companies tend not to have female directors. On the other hand, owner-managed companies are likely to have female directors and chief executive officers (CEOs). Company size and foreign shareholdings do not have significant relationships with the presence of female directors. Second, while some past studies in the United States and European countries find evidence of "?tokenism,"? whereby female-led companies do not appoint additional females as directors, we do not find such evidence among Japanese companies. Third, while foreign-owned companies and companies engaged in overseas activities tend to have foreign directors, other company characteristics, such as size and listing status, do not have systematic relationships with the presence of foreign directors.
Open Access
Innovation in the service sector and the role of patents and trade secrets
(Crawford School of Public Policy, The Australian National University, 2014-03) Morikawa, Masayuki
This paper, using Japanese firm-level data, presents findings about innovative activities in the service sector and the role of patents and trade secrets on innovation. According to the analysis, first, service firms have fewer product innovations than do manufacturing firms, but the productivity of innovative service firms is very high. Second, service firms have a low propensity for holding patents, but their holding of trade secrets is comparable to that of the manufacturing firms. Third, patents and trade secrets have positive relationships with product innovations, and the effects are quantitatively similar in magnitude in both the manufacturing and the service sectors. On the other hand, a positive relationship between trade secrets and process innovations is found only in the manufacturing sector. These results suggest a pivotal role of the law protecting trade secrets on innovation and productivity growth in the service sector.
Open Access
Japan's Foreign Economic Policy Strategies and Economic Performance
(Crawford School of Public Policy, The Australian National University, 2014-04) Drysdale, Peter; Armstrong, Shiro
The economic rise of Japan in the 1980s was underpinned by commitment to catching up through domestic reform and accommodated externally within the framework of the postwar multilateral institutions like the GATT/WTO. Regional cooperative processes like APEC later complemented that framework, encouraging unilateral reform across the region. Following the bursting of the asset bubble in the early 1990s and the onset of the Asian Financial Crisis, Japan turned from reliance on the multilateral system to policies based on preferential bilateralism in trade policy to secure its regional trading interests. Japan's bilateral trade agreements have been largely ineffective in supporting the kind of deep-seated reform to regulatory institutions and competition policies needed to sustain long-term productivity growth. The evidence suggests that Japanese productivity has underperformed against its peers in the industrial world and Asia. Instead of using foreign economic policy as an instrument of domestic reform and productivity enhancement Japan has used bilateral deals largely as political and strategic tools. Re-establishing a link between Japan's domestic reform agenda and its economic diplomacy is important for structural reform and national economic success, as is a more sure-footed engagement with China.
Open Access
A Comparison of the Wage Structure between the Public and Private Sectors in Japan
(Crawford School of Public Policy, The Australian National University, 2014-04) Morikawa, Masayuki
This paper compares the wage structure between the public and private sectors in Japan by using a large microdata set covering public and private sector employees. Rather than comparing overall wage levels, we examine the differences in relative wages by gender, age, education, and region. According to the estimation of wage functions, wage gaps by gender and educational attainment are smaller in the public sector than in private companies. The public sector's age-wage profile is steeper than that of the private sector. Public sector wages are more compressed||the wages are relatively higher at the lower end of the wage distribution and relatively lower at the higher end. The regional wage differential is smaller in the public sector. As a result, the wage level of public sector workers is relatively higher in rural regions and relatively lower in large metropolitan regions. To ensure the efficient provision of public services, it is inappropriate to compare only average wages. We should carefully observe the differences in wage structure by individual characteristics and by region.
Open Access
Do Japanese MNCs use Expatriates to Contain Risk in Asian Host Countries?
(Crawford School of Public Policy, The Australian National University, 2015-01) Bassino, Jean-Pascal; Dovis, Marion; van der Eng, Pierre
We investigate the impact of host country risk on the expatriation strategies of multinational firms, using data on Japanese subsidiary firms in manufacturing industry in 13 host countries in Asia. We find that country risk is negatively correlated with the degree of expatriation and that, rather than host country risk, firm-specific factors (particularly capital intensity, ownership share of parent firms in subsidiaries and the age of the venture) explain most of the variation in the degree to which subsidiaries rely on Japanese expatriates. Contrary to previous studies, the capital intensity of production is a key explanatory firm-specific variable that correlates positively with the degree of expatriation. Japanese MNCs do not rely on expatriates to off-set host country risk, but to mitigate risk to parent investment in subsidiaries.
Open Access
The economic impact of the Australia-United States free trade agreement
(Crawford School of Public Policy, The Australian National University, 2015-01) Armstrong, Shiro
The Australia-United States free trade agreement (AUSFTA) came into effect in 2005. It was the second preferential trade agreement that Australia signed, after its agreement with Singapore, and marked a departure from the primacy of Australia's previous trade policy of unilateral and multilateral trade liberalisation towards preferential liberalisation. This paper assesses the economic effects of AUSFTA by applying the Productivity Commission's gravity model of trade from its Bilateral and Regional Trade Agreements review. The evidence reveals AUSFTA resulted in a fall in Australian and US trade with the rest of the world"??that the agreement led to trade diversion. Estimates also show that AUSFTA is associated with a reduction in trade between Australia and the United States.
Open Access
Trends in Stock-Bond Correlations
(Crawford School of Public Policy, The Australian National University, 2015-04) Ohmi, Harumi; Okimoto, Tatsuyoshi
Previous research document the existence of long-run trends in comovements in the stock and bond markets. Following these findings, this paper examines possible trends in stock- bond return correlations. To this end, we introduce a trend component into a smooth transition regression (STR) model including the multiple transition variables of Aslanidis and Christiansen (2012). The results indicate the existence of significant decreasing trends in stock-bond correlations for many advanced safer countries. In addition, although stock market volatility continues to be an important factor in stock-bond correlations, the short rate and yield spread become only marginally significant once we introduce the trend component. Our out-of-sample analysis also demonstrates that the STR model including the VIX and time trend as the transition variables dominates other models. Furthermore, we find a significant increase in stock-bond correlations for riskier Euro countries around the beginning of the Euro crisis. Our findings of decreasing and increasing trends in stock-bond correlations can be considered a consequence of the decreasing effects of diversification and more intensive flight-to-quality behavior that have taken place in recent years and after the Euro crisis.
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The term structure of credit spreads and business cycle in Japan
(Crawford School of Public Policy, The Australian National University, 2016-02) Okimoto, Tatsuyoshi; Sumiko Takaoka
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 with an A or BBB rating has more useful information than the government bond yield curve for predicting the business cycle in Japan. However, our results indicate that the increase in the BBB-rated credit spread is associated with future economic growth, 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 in Japan regardless of the economic state.
Open Access
Increasing trends in the excess comovement of commodity prices
(Crawford School of Public Policy, The Australian National University, 2016-02) Ohashi, Kazuhiko; Okimoto, Tatsuyoshi
We investigate how the excess comovement of commodity prices, that is, the correlation in commodity returns after filtering out common fundamental shocks, has changed over the past three decades by developing the smooth-transition dynamic conditional correlation model that can capture long-run trends and short-run dynamics of correlation simultaneously. Using data from 1983 to 2011, we find that significant increasing long-run trends in excess comovement have appeared since around 2000. We confirm that these increasing trends are neither an artefact of the financial crisis after the bankruptcy of Lehman Brothers in September 2008 nor the time-varying sensitivities of commodity returns to common fundamental shocks. Moreover, we find that no significant increasing trends exist in the excess comovement among off-index commodities and that the surge of global demand alone cannot explain the increasing trends. These findings provide additional evidence for the timing and scope of the recent increasing commodity-return correlations that suggest the influence of the financialization of commodity markets starting around 2000.
Open Access
Fiscal Sustainability in Japan
(Crawford School of Public Policy, The Australian National University, 2016-02) Armstrong, Shiro; Okimoto, Tatsuyoshi
Japanese government debt is at unprecedented levels with a gross debt to GDP ratio of over 230% and a net debt to GDP ratio of 150%. There are three big challenges to fiscal sustainability: the huge government bonds outstanding||continued budget deficits||and the growing age-related spending. The debt is sustainable as long as the market as a whole believes it is. The path to fiscal consolidation requires increasing the tax rate, reducing spending, broadening the tax base and growing the economy out of trouble. The longer the delay before moving to a more sustainable consolidation path, the larger the risks and closer Japan moves towards a financial crisis. The policy goal is to keep government debt sustainable, not to repay it all. Just as Japan has done since the burst of the asset bubble in the early 1990s there is every likelihood that the Japanese economy will muddle through.

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