Tax Policy and Consumer Spending: Evidence from Japanese Fiscal Experiments

This paper studies the extent to which the impact of tax policy on consumer spending differs between temporary and permanent, as well as anticipated and unanticipated tax changes. To discriminate between them, we use institutional information such as legal distinction between temporary and permanent tax changes, as well as timing of policy announcement and implementation. We find that the impact of temporary changes is significantly smaller than the impact of permanent changes. We also find that more than 80 per cent of Japanese consumers, including those who distinguish between temporary and permanent tax changes, respond to tax changes at the time of their implementation and not at the time of a policy announcement. We suggest an interpretation that these consumers follow a near-rational decision rule.

The Great Intervention and Massive Money Injection: The Japanese Experience 2003-2004

From the beginning of 2003 to the spring of 2004, Japan's monetary authorities conducted large-scale yen-selling/dollar-buying operations in what Taylor (2006) has labeled the "Great Intervention." This paper examines the relationship between this "Great Intervention" and the quantitative easing policy the Bank of Japan was pursuing at that time. First, we find that about 40 percent of the yen funds supplied to the market by yen-selling interventions were not offset by the BOJ's monetary operations and remained in the market for a while; this is in contrast with the preceding period, when almost 100 percent were immediately offset. Second, comparing interventions and other government payments, the extent to which the funds were offset was much smaller in the case of interventions, suggesting that the BOJ differentiated between, and responded differently to, interventions and other government payments. These two findings indicate that it is likely that the BOJ intentionally did not sterilize yen-selling interventions to achieve its policy target of maintaining the current account balances of commercial banks at the BOJ at a high level. Finally, we find that an unsterilized intervention had a greater impact on the yen-dollar rate than a sterilized one, suggesting that it matters whether an intervention is sterilized or not even when the economy is in a liquidity trap

Novel and topical business news and their impact on stock market activities

We propose an indicator to measure the degree to which a particular news article is novel, as well as an indicator to measure the degree to which a particular news item attracts attention from investors. The novelty measure is obtained by comparing the extent to which a particular news article is similar to earlier news articles, and an article is regarded as novel if there was no similar article before it. On the other hand, we say a news item receives a lot of attention and thus is highly topical if it is simultaneously reported by many news agencies and read by many investors who receive news from those agencies. The topicality measure for a news item is obtained by counting the number of news articles whose content is similar to an original news article but which are delivered by other news agencies. To check the performance of the indicators, we empirically examine how these indicators are correlated with intraday financial market indicators such as the number of transactions and price volatility. Specifically, we use a dataset consisting of over 90 million business news articles reported in English and a dataset consisting of minute-by-minute stock prices on the New York Stock Exchange and the NASDAQ Stock Market from 2003 to 2014, and show that stock prices and transaction volumes exhibited a significant response to a news article when it is novel and topical.Comment: 8 pages, 6 figures, 2 table

The Responses of Consumption and Prices in Japan to the COVID-19 Crisis and the Tohoku Earthquake

This note compares the responses of consumption and prices to the COVID-19 shock and another large-scale natural disaster that hit Japan, the Tohoku earthquake in March 2011. The comparison shows that the responses of supermarket sales and prices at a daily frequency during the two crises are quite similar: (1) the year-on-year rate of sales growth increased quickly and reached a peak of 20 percent two weeks after the outbreak of COVID-19 in Japan, which is quite similar to the response immediately after the earthquake; (2) the items consumers purchased at supermarkets in these two crisis are almost identical; (3) the year-on-year rate of consumer price inflation for goods rose by 0.6 percentage points in response to the coronavirus shock, compared to 2.2 percentage points in the wake of the earthquake. However, evidence suggests that whereas people expected higher inflation for goods and services in the wake of the earthquake, they expect lower inflation in response to the coronavirus shock. This difference in inflation expectations suggests that the economic deterioration due to COVID-19 should be viewed as driven mainly by an adverse aggregate demand shock to face-to-face service industries such as hotels and leisure, transportation, and retail, rather than as driven by an aggregate supply shock

Firm Age and the Evolution of Borrowing Costs: Evidence from Japanese Small Firms

This paper investigates how a firm's borrowing cost evolves as it ages. Using a new data set of more than 200,000 bank-dependent small firms for 1997-2002, we find the following. First, the distribution of borrowing costs tends to become less skewed to the right over time, which can be partially attributed to "selection" (i.e., exits of defaulting firms reduce the total borrowing costs), but is mainly explained by "adaptation" (i.e., surviving firms' borrowing costs decline as they age). Second, the selection process is natural in that firms with lower quality are separated, charged higher borrowing costs, and eventually forced to exit, which contrasts with the results of previous studies on Japan's credit misallocations, such as Peek and Rosengren (2005). Third, in the adaptation process, we find an age dependence of firms' borrowing costs even if we control for firm size.firm age, borrowing cost, selection, credit allocation, reputation

Fiscal Policy Switching: Evidence from Japan, the U.S., and the U.K.

This paper estimates fiscal policy feedback rules in Japan, the United States, and the United Kingdom for more than a century, allowing for stochastic regime changes. Estimating a Markov-switching model by the Bayesian method, we find the following: First, the Japanese data clearly reject the view that the fiscal policy regime is fixed, i.e., that the Japanese government adopted a Ricardian or a non-Ricardian regime throughout the entire period. Instead, our results indicate a stochastic switch of the debt-GDP ratio between stationary and nonstationary processes, and thus a stochastic switch between Ricardian and non-Ricardian regimes. Second, our simulation exercises using the estimated parameters and transition probabilities do not necessarily reject the possibility that the debt-GDP ratio may be nonstationary even in the long run (i.e., globally nonstationary). Third, the Japanese result is in sharp contrast with the results for the U.S. and the U.K. which indicate that in these countries the government's fiscal behavior is consistently characterized by Ricardian policy.Fiscal Policy Rule, Fiscal Discipline, Markov-Switching Regression