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The term structure of credit spreads and business cycle in Japan

Tatsuyoshi Okimoto () and Sumiko Takaoka

Journal of the Japanese and International Economies, 2017, vol. 45, issue C, 27-36

Abstract: 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.

Keywords: Business cycle; Corporate bond spreads; Government bond yields; Markov-switching model (search for similar items in EconPapers)
JEL-codes: E32 E43 E44 G12 (search for similar items in EconPapers)
Date: 2017
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