Comments on International Transmission of

Japanese Monetary Policy Shocks Under Low and

Negative Interest Rates: A Global FVAR Approach

December 1, 2016

Toshitaka Sekine
Research and Statistics Department
Bank of Japan
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian
Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI
does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology
used may not necessarily be consistent with ADB official terms.
 Contribution
A growing number of papers examining
spillovers of the Feds (and the ECBs)
monetary policy.
In contrast, very few papers have examined
those of the BoJs monetary policy.
Ganelli, G. and N. Tawk (2016): Spillovers from
Japans Unconventional Monetary Policy to
Emerging Asia: A Global VAR Approach, IMF
Working Paper, WP/16/99.
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 Key findings
Using FAVARs which include:
LCI and GCI (two factors which are supposed to
represent real activities) plus CPI inflation
NEER for JP (REER for KR, CN and US)
US and JP 2-year government bond rates
The paper finds:
1. JP 2-year rate affects LCI and CPI substantively.
2. (JP spillover) < (US spillover) not only for KR, CN
and US, but also for JP.

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Comment 1: What are LCI and GCI?
Chg./Level Real/Nominal
IIP change real
Unemp. rate level real
Housing starts level real
Stock price change nominal
M1 change nominal
M2 change nominal
PPI change nominal
JGB 1yr level nominal
JGB 2yr level nominal

Do they really capture real activities?

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Comment 1: What are LCI and GCI?
Correlation coefficients
Chg./Level Real/Nominal LCI LCI w/o JGBs
IIP change real -0.02 0.07
Unemp. rate level real -0.71 -0.52
Housing starts level real 0.62 0.31
Stock price change nominal -0.16 0.02
M1 change nominal -0.07 -0.25
M2 change nominal -0.05 -0.15
PPI change nominal 0.13 0.33
JGB 1yr level nominal 0.90 0.25
JGB 2yr level nominal 0.92 0.30

LCI without interest rates looks better?

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High correlation with the output gap
4

-2

Output gap (BoJ estimate) -4

LCI (0.65)

LCI without int rates (0.85) -6

-8
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Figures in parentheses are correlation coefficients with the output gap. 6

 Comment 2: Why 2-year rates matter?
135 5
Is the higher
US treasury
125
USD/JPY (lhs)
4 yields bad for
2yr Treasury - 2yr JGB (rhs) JP?
115
3
impulse
response of US
105
rate hike
2
How important
95
the FOREX
1 transmission
85
is?
treat FOEX
75 0
2004 2005 2006 2007 2008 2009 2010 2011 2012 exogenous
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Comment 2: Why 2-year rates matter?
155 7

145 USD/JPY (lhs) 6

2yr Treasury - 2yr JGB (rhs)
135
5

125
4
115
3
105

2
95

85 1

75 0
1998 2001 2004 2007 2010 2013 2016

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Comment 2: Why not 10-year rates?
155 5.5

145
USD/JPY (lhs)
4.5
135
10yr Treasury - 10yr JGB (rhs)

125
3.5

115

2.5
105

95
1.5
85

75 0.5
1998 2001 2004 2007 2010 2013 2016

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Question: How much should we cut 2 year
JGB yields to achieve 2% inflation?
0.3 (%)

0.2
JGB 1-yr
JGB 2-yr
0.1
JGB 10-yr

0.0

-0.1

-0.2

-0.3

-0.4

-0.5

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 Summing up
Very nice paper!!

More elaboration on what GCI and LCI are.

More discussion on transmission through the
exchange rate.
Robustness check using other maturities.

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