The Credit Spread Curve Distribution and Economic Fluctuations in Japan

Author Name OKIMOTO Tatsuyoshi (Visiting Fellow, RIETI) / TAKAOKA Sumiko (Seikei University)
Creation Date/NO. April 2020 20-E-030
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First draft: April 2020
Revised: April 2021


Predicting the future economy is of great interest for practitioners and policymakers. This study challenges this problem by examining the relation between credit spread curves and future economic activity. To this end, we construct a monthly empirical distribution of credit spread curves by calculating credit spreads of corporate bonds at the firm level in Japan and examine whether it can be used to predict a Japanese business cycle. We find that the credit spread curve information in higher deciles (implying lower credit quality) provides more predictive power for the future economy than the information of government bond yield curve or the credit spread index suggested by the previous studies. Also, the smooth-transition predictive regression analysis demonstrates that the credit spread curves have more predictive power under the low uncertainty regime, and show a significant predictive power for a short horizon for both regimes. Finally, our component-wise analysis shows that the credit spread curve information has robust predictive power for producer-side indicators under the low uncertainty regime and for labor market conditions regardless of the regime.