A comparison of two alternative composite leading indicators for detecting Japanese business cycle turning points

Abstract

The Organisation for Economic Cooperation and Development (OECD) has developed a system of Composite Leading Indicators (CLIs) for its member countries. On the other hand, the Japanese government has released another CLI for detecting the Japanese business cycle turning points. Both CLIs are widely used alternatives. These two CLIs may provide different business forecasts. When different forecasts occur, how can we interpret the discrepancies? This article tries to answer this question by clarifying their relationships.

Acknowledgements

We are grateful to Alessandra Iacobucci for providing us their MATLAB code to apply the HW filter. We would also like to thank an anonymous referee for valuable comments on the earlier version of this article. This work was partly supported by KAKENHI (19530241).

Notes

¹In applied econometric works, the filters by Hodrick and Prescott (1997) and Christiano and Fitzgerald (2003) are also popular. See, e.g., Furceri and Karras (2008). But we do not choose them because both filters introduce phase shifts when filtering. For further information, see Iacobucci and Noullez (2005).

²Although the end of sample period is January 2007, in all figures of this article, we only plot until around January 2003 because the last business cycle turning point is located at January 2002.