Yield Spread and Economic Policy Uncertainty: Evidence from Japan
Round 1
Reviewer 1 Report
INTRODUCTION
Authors elaborate on the background of the research in an analytical and detailed manner, as well as the previous research. However, their choice to use NARDL model is not sufficiently elaborated. Please, elaborate why you have chosen this model (e.g. why it would be more appropriate than other similar methodologies). You should also note if other authors have used NARDL model in their research of the same or similar subjects.
Do not elaborate abbreviations twice, e.g. nonlinear ARDL (NARDL), since you have already elaborated NARDL at the beginning of the chapter.
DATA AND VARIABLES
Please, state at the beginning of the chapter that you investigate the Japanese stock market. After that elaborate why you have chosen the Japanese stock market. It should be better elaborated if the Japanese stock market has some specificities in comparison with other stock markets, and the same should be elaborated for the Japanese economy. Authors should elaborate on what kind of stocks are the most traded (domestic or foreign).
The expression “; thus, it is natural to speculate that Japanese EPU is abnormal” is not in line with standard statistical language. Please, find in the literature how to express that the distribution of the variables is not following the normal distribution. You cannot say that it is abnormal! In addition, you should elaborate on what are the repercussions of the fact that the distribution is not following a normal distribution, in terms of the used methodology.
Please, elaborate on why you have focused on the observed time period.
ANALYTICAL FRAMEWORK AND METHODOLOGY
Elaborate the abbreviation ARDL (p.4, line 145), as well as NARDL. Start a new paragraph at p.6, line 196.
At the end of the chapter, you should add one more paragraph in which you will elaborate on what procedure you will use in the next chapter.
EMPIRICAL RESULTS
Please, add one more subchapter Summary of empirical results and here present the brief outlook to your results. The interested reader would like to read such a chapter since the NARDL methodology is not widely known. This chapter should be non-technical as much as possible.
DISCUSSION
I would like to see a well-developed discussion (minimum two pages) comparing and contrasting solution/results presented in the work with existing work and then a subsection of it presenting contributions to theory/knowledge/literature (at least one to two paragraphs) and followed by a subsection on Implications for practice (at least one page).
CONCLUSION
In the last section, please focus on “Discussion, Implication, and Conclusion” to include
(1). Provide short summary of the research
(2). Theoretical contributions
(3). Managerial Implications
(5). Limitations of the paper
(6). Future Studies and Recommendations
The overall document should be checked for grammar, syntax and typos errors. Based on the above comments, I strongly believe that the authors will improve the quality of their manuscript given that they will make a detailed revision of the manuscript based on the provided comments.
Author Response
INTRODUCTION
Authors elaborate on the background of the research in an analytical and detailed manner, as well as the previous research. However, their choice to use NARDL model is not sufficiently elaborated. Please, elaborate why you have chosen this model (e.g. why it would be more appropriate than other similar methodologies). You should also note if other authors have used NARDL model in their research of the same or similar subjects.
I have added a description in p.3.”Due to the characteristics of NARDL model, which can help us to capture the short- and long- run asymmetric adjustment procedure of explained variables through both positive and negative partial sum decompositions of changes in explanatory variables.”
Also, as described in the previous section, we took some academic for examples to interpret why we choose NARDL model as our method.
Do not elaborate abbreviations twice, e.g. nonlinear ARDL (NARDL), since you have already elaborated NARDL at the beginning of the chapter.
We have corrected the mistake in the attachment revised file.
DATA AND VARIABLES
Please, state at the beginning of the chapter that you investigate the Japanese stock market. After that elaborate why you have chosen the Japanese stock market. It should be better elaborated if the Japanese stock market has some specificities in comparison with other stock markets, and the same should be elaborated for the Japanese economy. Authors should elaborate on what kind of stocks are the most traded (domestic or foreign).
We give the explanation in the revised file p.4.” To sum up, this is the first paper that captures the relationship among yield spread, EPU and stock market in Japan. Based on the proper NARDL method adopted, we successfully explore short- and long- run asymmetric reactions in financial variables, treasury yield spread, which is markedly sensitive to negative shocks resulting from EPU, while take BOJ’s Stock Purchasing Plan in October 2002 into consideration, by the features of NARDL, we have the economic implication that the role of flight from quality does not exist in the asset portfolio adjustment.” , p.10” Accompanying with quality and quantitative easing, the BOJ announced the Stock Purchasing Plan in October 2002.”
p.13” Due to quality and quantitative easing, the BOJ announced the Stock Purchasing Plan in October 2002, and the scripture has explored that stock markets can foresee the economic outlook. Accordingly, we have the motivation to examine the relationship among yield spread, EPU and stock market.”
p.14~p.15” Japan in the country that adopted the longest history of unconventional monetary policies in the world. Since 1990s, the BOJ started to employ easing monetary to rescue Japanese low inflation and poor economic performance, including ZIRP, quantitative easing, qualitative and quantitative easing, and also assets purchasing, such as Stock Purchasing Plan in 2002 and Yield Curve Control in 2016.”
The expression “; thus, it is natural to speculate that Japanese EPU is abnormal” is not in line with standard statistical language. Please, find in the literature how to express that the distribution of the variables is not following the normal distribution. You cannot say that it is abnormal! In addition, you should elaborate on what are the repercussions of the fact that the distribution is not following a normal distribution, in terms of the used methodology.
We revised the description in p.5” Based on the results of the Jarque-Bera test, the hypothesis of normality for the unconditional distribution for EPU is rejected; thus, it is natural to speculate that Japanese EPU does not follow normal distribution.”
p.10~p.11 “The Jarque-Bera test results shown in Table 4 reveal that the Nikkei 225 rate of return doesn’t follow normal distribution.”
Please, elaborate on why you have focused on the observed time period.
We elaborate the reason in p.4.” Because the BOJ has launched the longest history of easing monetary policies since 1990s, we obtain monthly data from Bloomberg, during the period from September 1990 to October 2019, almost 30 years.”
ANALYTICAL FRAMEWORK AND METHODOLOGY
Elaborate the abbreviation ARDL (p.4, line 145), as well as NARDL. Start a new paragraph at p.6, line 196.
At the end of the chapter, you should add one more paragraph in which you will elaborate on what procedure you will use in the next chapter.
We added the description in p.7.” Next, we depict the empirical results, including unit tests, eliminating the existing of I(2) series, and dynamic symmetric and asymmetric estimation of yield spread adjustments, followed NARDL method.”
EMPIRICAL RESULTS
Please, add one more subchapter Summary of empirical results and here present the brief outlook to your results. The interested reader would like to read such a chapter since the NARDL methodology is not widely known. This chapter should be non-technical as much as possible.
I added the description in p.13~p.14” As the term premium between long-term and short-term interest rates existing time variation, recently, some academic shows that the forecasting contribution of the yield spread is shrinking. Further, because of the longest unconventional monetary policies adapted in the world, the mixed results and even failure of yield spread about macroeconomic outlook forecasting contribution in Japan. Recently, research has identified EPU as an indicator of macroeconomic outlook forecasting tool. Due to quality and quantitative easing, the BOJ announced the Stock Purchasing Plan in October 2002, and the scripture has explored that stock markets can foresee the economic outlook. Accordingly, we have the motivation to examine the relationship among yield spread, EPU and stock market. There exists asymmetric or nonlinear responses in financial markets when exogenous shocks
occur in another assets’ prices. NARDL model that we adopt in this paper helps us to we find a significant positive nexus between the treasury yield spread and EPU reduction in the long run. This means when facing a good economy, bond agents are quick to sell, especially higher-risk long-term interest rate bonds, whereas take BOJ’s Stock Purchasing Plan in October 2002 into consideration, by the features of NARDL, we have the economic implication that the role of flight from quality does not exist in the asset portfolio adjustment.”
DISCUSSION
I would like to see a well-developed discussion (minimum two pages) comparing and contrasting solution/results presented in the work with existing work and then a subsection of it presenting contributions to theory/knowledge/literature (at least one to two paragraphs) and followed by a subsection on Implications for practice (at least one page).
CONCLUSION
In the last section, please focus on “Discussion, Implication, and Conclusion” to include
(1). Provide short summary of the research
(2). Theoretical contributions
(3). Managerial Implications
(5). Limitations of the paper
(6). Future Studies and Recommendations
I revised the description in p.14~p.15” Japan in the country that adopted the longest history of unconventional monetary policies in the world. Since 1990s, the BOJ started to employ easing monetary to rescue Japanese low inflation and poor economic performance, including ZIRP, quantitative easing, qualitative and quantitative easing, and also assets purchasing, such as Stock Purchasing Plan in 2002 and Yield Curve Control in 2016). People traditionally rely on yields spreads as indicators for forecasting probability of a recession, whereas Hasegawa and Fukuta (2011) reveal that because of the economic structure break in 1996, the Japanese spread lost some of its forecasting ability. Besides, the time variation existing in the adjustment of the term premium appeared in the long-term and short-term interests also decline the contribution of prediction. Based the particularity of Japanese monetary policy and the declining recession predictive ability, we have the motivation to examine the reactions among treasury yield spread and other financial variables.
To our best know, this is the first paper that explores the response of Japanese treasury yield spread which may have asymmetric and nonlinear features when exogenous variables occur shocks. We use a proper NARDL methodology to successfully capture the short- and long- run asymmetric reactions in treasury yield spread, which is markedly sensitive to negative shocks resulting from EPU, the indicator identified as the predicting macroeconomic outlook index. Also, we explore that, in Japan, in the long run, the role of a negative shock in EPU dominates the positive shock, and a negative shock in economic policy uncertainty has a significant and asymmetric effect on the yield spread. The results are in line with the investigation from Shin et al. (2014) that when the uncertainty decreases, indicating a good economic outlook, according to the expectation hypothesis, bond market agents tend to change their strategies much more quickly to sell higher-risk long-term bonds. However, when we go back to check the influence of positive shock in EPU on yield spread, we have ambiguous empirical results. We speculate that merely examining the nexus between the yield spread and EPU could not capture the full picture of the low interest rate environment in Japan.
Next, due to the power of stock markets to forecast the macroeconomy, and the BOJ announced the Stock Purchase Plan as one of the quantitative easing tools that have been employed since October 2002. Taking the Japanese stock market into consideration (here we take Nikkei 225 as the proxy of Stock Purchasing Plan), based on portfolio management, we find that the amplitude of a negative shock in EPU dominates its positive shock, and the positive shock in the Nikkei 225 dominates its negative shock. The influence of good economic performance on the yield spread in our sample is in line with Li et al. (2015): long-term easing monetary policy increases demand for both bonds (especially the demand for the long-term treasuries, according to the expectation and compensation hypothesis) and stocks, and the hypothesis of flight to (or from) quality is not supported.
In conclusion, intending to expand inflation and the economy, the monetary policy authority in Japan has been used to easing money policy for several decades. When we take the stock market into consideration, and the correlations among the yield spread, EPU and stock market capture of the full picture of the effects of the low interest rate environment in Japan. Although it contributes by highlighting and investigates the significance of the policy implementations, this study could possibly be extended to all European Union countries, the United States, and emerging markets or by applying a regional comparison.”
Reviewer 2 Report
In addition: The Bank of Japan introduced some years ago the so called "Yield Curve Control" and by this effectively manipulate the yield curve. The authors need to discuss this issue and whether the analysis of the yield curve could still make sense given this massive manipulation.
The layout of figures and tables is often not professional.
Finally, I am not sure if the topic of the paper fits to the journal.
Author Response
In addition: The Bank of Japan introduced some years ago the so called "Yield Curve Control" and by this effectively manipulate the yield curve. The authors need to discuss this issue and whether the analysis of the yield curve could still make sense given this massive manipulation.
We added the description in the revised file p.3” Japan is the country that adopts the longest long period of unconventional easing monetary policy in the world. Since 1999, BOJ implemented the zero interest rate policy (ZIRP) and introduced a quantitative easing policy in 2001 and announced the Stock Purchasing Plan in October 2002. In 2010-2013, after the global financial crisis and covering the Eurozone crisis period, the BOJ carried out subsequent rounds of asset purchases called “comprehensive monetary easing” policies. The BOJ went one step further by introducing quantitative and qualitative monetary easing (QQE)[1] in April 2013 to achieve its 2% inflation stability target, and the QQE program was further expanded in October 2014. Since February 2016, the QQE program has also included a negative interest rate on part of banks’ excess reserves with the BOJ, and furthermore, the BOJ introduced yield curve control in September 2016, in order to push the inflation rate to the 2% aim goal.”
p.14~p.15” Japan in the country that adopted the longest history of unconventional monetary policies in the world. Since 1990s, the BOJ started to employ easing monetary to rescue Japanese low inflation and poor economic performance, including ZIRP, quantitative easing, qualitative and quantitative easing, and also assets purchasing, such as Stock Purchasing Plan in 2002 and Yield Curve Control in 2016).
The layout of figures and tables is often not professional.
We have modified my figures and tables in p.5., p.6., p.8., p.9., p.10, p.11., p.14.
Finally, I am not sure if the topic of the paper fits to the journal.
I speculate that the one theme of our research is trying to explore interaction between the governance (the BOP) and the market participants. The empirical results of our research help us to understand what the BOJ use monetary policy and who market players react.
Round 2
Reviewer 1 Report
Dear author, thank you for your revised paper. I find that you have successfully implemented the required changes. Congratulations on your work!
Reviewer 2 Report
no comments.
