Abstract

PurposeThis study explores the response of consumer confidence in policy uncertainty in the Japanese context. The study also considers the dynamism of stock market behavior and financial stress and its impact on consumer confidence, which has remained unaddressed in the literature. The role of these control variables has important implications for policy discussions, particularly when other countries can learn from Japanese experiences.Design/methodology/approachThe nonlinear autoregressive distributed lag model postulated by Shin et al. (2014) was used for studying the asymmetric response of consumer confidence to policy uncertainty. This method has improved estimates compared to traditional linear cointegration methods.FindingsThe findings confirm the asymmetric impact of policy uncertainty on the consumer confidence index in Japan. The impact of the rise in policy uncertainty is greater than that of a fall in asymmetry on consumer confidence in Japan. Furthermore, the Wald test confirmed asymmetric behavior.Originality/valueThe contribution of this study is threefold. First, this study contributes to the extant literature by analyzing the asymmetric response of consumer confidence to policy uncertainty, controlling for both the financial stress and stock price indices. Second, to test the robustness of the exercise, the study utilized different frequencies of observations. Third, this study is the first to utilize the concept of Arbatli et al. (2017) to formulate a combined index of uncertainty based on economic policy uncertainty index, along with uncertainty indices such as fiscal, monetary, trade and exchange rate policies to study the overall impact of policy uncertainty.

Highlights

  • In Japan, an untenable fiscal path accompanied by monetary policy restraints magnified uncertainty in the country

  • On examining the asymmetric impact based on the nonlinear ARDL, the results indicate that nonlinear cointegrating relation exist between consumer confidence index, overall uncertainty index, financial stress index and stock price index for Japan, evident from F-statistics Panel B of Table 5

  • Conclusion and policy implications This study, based on monthly observations covering the period from the first month of 1995 to the third month of 2018, explored the asymmetric influence of the overall policy uncertainty index generated through the principal component analysis based on the data sets developed (Arbatli et al, 2017) on consumer confidence index in Japan, using the nonlinear methodology of ARDL, developed by Shin et al (2014)

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Summary

Introduction

In Japan, an untenable fiscal path accompanied by monetary policy restraints magnified uncertainty in the country. The behavior of the economy proved that continuing with “Abenomics” was challenging. Against this background, we attempt to explore the impact of policy uncertainty changes on consumer confidence. To what extent does financial stress affect consumer confidence? Considering the pioneering work of Katona (1975), a long series of studies have explored the significance of consumer confidence and its implications on economic performance. Published in Journal of Asian Business and Economic Studies. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/ legalcode

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