Abstract
Japan is the most developed economy in Asia. However, it has been on record for being the most heavily indebted country among OECD countries. In many circumstances, the high sovereign debt level indicates a high possibility of sovereign credit risks associated with investment in government bond. The high sovereign credit risk may also generate a number of negative externalities for private businesses operating in the host country. This paper investigates whether sovereign credit risk of Japan as measured by its sovereign credit default swap (SCDS) can better predict and commove with sovereign credit risk of selected ASEAN countries. The bivariate VAR model was used to test for Granger Causalities among these countries SCDS premiums and correlation analysis to investigate co-movements between SCDS of these countries. The results indicate that Japan’s sovereign credit risks do not co-move with those of ASEAN countries, Furthermore, Sovereign credit risks of ASEAN countries tend to lead those of Japan as evidenced by unidirectional causalities from these countries to Japan. The overall suggestion is that sovereign credit risk of Japan is not likely to influence those of ASEAN. The paper concludes with some implications for businesses.
Highlights
The current fiscal situation of Japan characterized by a very high debt-to-GDP ratio which is currently about 229.2% of GDP, coupled with a slowdown in economic growth and with increasing ageing problem hindering the productivity of Japan’s labor force has attracted a lot of attention in literature
Consistent with Cho et al (2014), correlation analysis reveals that Japan’s sovereign credit default swap (SCDS) does not co-move with those of ASEAN countries as shown by very weak positive correlations and negative correlations are noted between Japan vs. Malaysia and Japan vs. Thailand
The implication of these results is that whenever we see changes in sovereign credit risks of Japan measured by its SCDS spreads, we should not expect the sovereign credit risk of ASEAN countries to change
Summary
The current fiscal situation of Japan characterized by a very high debt-to-GDP ratio which is currently about 229.2% of GDP, coupled with a slowdown in economic growth and with increasing ageing problem hindering the productivity of Japan’s labor force has attracted a lot of attention in literature. While Japanese economy currently faces deterioration in growth rates and fiscal balance, its safety nets against sovereign credit risks comes from the strong financial system and international reserves that it holds. The analysis of sovereign credit risk of Japan especially when it is struggling to accommodate its debt burdens is very significant to international businesses which always invest in Japanese government bonds. While many papers have concentrated on analyzing Japan’s debt sustainability and its sovereign credit risks, very few papers have investigated the transmission and spillover of financial shocks between Japan and ASEAN countries. The paper contributes to existing literature by extending Cho et al (2014) to provide some empirical evidence on the direction of causality for sovereign credit risks of Japan and those of selected ASEAN countries. This study will provide some light on the likelihood of ASEAN countries being affected by the crises in Japan and vice-versa
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