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.