Are consumer sentiments useful in Japan? An application of a new market-timing test

Abstract

We investigate whether consumer sentiment in Japan is a useful predictor of household consumption, durable goods consumption and the CPI using a recently developed market-timing test. We find that consumer sentiment is not useful for predicting an increase/decrease in household consumption, durable goods consumption, and CPI. The findings suggest that policy-makers may have difficulties obtaining useful qualitative information from consumers. However, using estimated threshold values for the increase/decrease, consumer sentiment became a useful predictor of durable goods consumption and CPI. This suggests that estimating relevant thresholds could enhance the use of directional analysis.

Keywords:

• market-timing test
• directional analysis
• consumption
• household
• survey data

JEL Classification:

• C53
• D12

Notes

¹ See http://www.esri.cao.go.jp/en/stat/shouhi/shouhi-e.html for details.

² We also consider the figures of the survey as two-quarters-ahead forecasts and as one-quarter-ahead forecasts. Those results are consistent with our main analysis, although they are not reported in this article.

³ A number of quantification methods have been suggested in the literature (e.g., Pesaran and Weale, 2006). The most common procedure, which is balanced statistics, is used in this study.

⁴ In previous studies, an increase/decrease in the price level has been examined because few countries experienced a reduction in the price level, or deflation. However, Japan has long experienced deflation, and thus we focus on both directions of change.

⁵ See Sinclair et al. (2010) for details and remarks.