Kiyohiko G Nishimura: Macro-prudential policy framework from an Asian
perspective
Speech by Mr Kiyohiko G Nishimura, Deputy Governor of the Bank of Japan, at the ADBI
FSA Conference, Tokyo, 30 September 2011.
* * *
Charts to the above speech can be found on the Bank of Japan website.
Introduction
In this presentation, I would like to take up several key issues relating to
macroeconomic policy frameworks explicitly taking account of financial markets, or
macroprudential policies, especially from an Asian perspective. In particular, I ask following two
questions: (1) What methods should we employ to detect intolerable accumulation of risks in
the financial system? and, (2) How should we maintain financial stability in the short run,
while improving efficiency in credit intermediation functions to support long-term economic
growth?
I will be seeking practical "best practice" answers to these questions, rather than
"optimum solutions" based on a particular theory.1 This practical and somewhat atheoretical
approach is warranted since we are still very much short of having a satisfactory
macroeconomic theory that deals adequately with complex and sometimes violent financial
markets, although there has emerged a sizable literature on the relationship between
macroeconomic activity and financial markets.
Before trying to answer these inherently difficult questions, it is worth looking back to
the evolution of the current financial crisis in the United States and Europe, and of that in
Japan two decades ago. Although much attention has been focused on financial excess as
typified by excessive leveraging in financial institutions, I would like to emphasize the
importance of underlying changes in fundamentals, especially demographic factors such as
population ageing. The latter has particularly important implications for the future in Asia. The
basic message here is that many of Asia's growing economies may face problems in the
near future similar to those of developed countries, and it is thus of the utmost importance to
implement appropriate macro-prudential policy now.
Section 1. Asia in perspective: financial crisis, its aftermath and fundamentals
Financial crisis and fundamentals: demographic factors
Although three years have passed since the so-called Lehman Shock, we are still in
the process of soul-searching; pursuing a better understanding of its causes and the
appropriate policy response to it. Since Japan and a number of Asian economies already
experienced their own financial crises in the 1990s, we Asians may be in a slightly better
position to compare them and draw the necessary lessons. Indeed, there are many
similarities between the recent crisis in the United States and the eurozone on the one hand,
and Japan's financial crisis since the 1990s on the other. In the case of both the US-
eurozone and the "Bubble Era" in Japan, risks were accumulated during the period of high
growth and low inflation.2 Risks were accumulated particularly in real-estate related sectors.
The recent literature on financial crises has focused mostly on explaining how bubbles
develop and influence economic activity through leveraging in financial markets.3 Here the
measures of economy-wide financial activity, such as deviation from the long-run trend of the
credit-to-GDP ratio, are considered to be informative and possible guides for
macroprudential policy.
However, I would like to emphasize another important background factor, that is,
demographic change in the form of population ageing. Indeed, the "bubble and burst" and
subsequent financial crisis seemed to coincide roughly with the turning-point of population
pyramids in Japan, the United States, and Europe. Let me show you some telling figures on
the inverse dependency ratio, which indicates how many people of working age it takes to
provide for one dependent person.4 The Japanese ratio peaked around 1990, and it was in
the very next year, 1991, that the Japanese Bubble peaked. The peak of the US ratio was
between 2005 and 2010, and the peak of the US subprime bubble was 2007 (Fig. 1). The
economically troubled countries of the eurozone have a similar pattern to Japan and the
United States. The ratios for Ireland and Spain have almost the same time profile; they
peaked around 2005, which corresponds to the peak of their property bubbles (Fig. 2). The
ratio for Greece and Portugal peaked around 2000. The significant point for us here is that
the financial crisis we have experienced has coincided closely with the turning point in these
demographic dynamics.
Asset price bubbles: dancing over the tide of fundamentals
The "life-cycle" theory, or more precisely speaking, overlapping generation models
suggest that demographic change is one of the most forceful drivers of asset prices. After all,
assets are a means of saving for the young and dissaving for the old, and thus the numbers
of the young and the old determine the demand and supply for these assets.5
The recent history of crisis seems to confirm this line of reasoning. In Figure 3, the real
land price in Japan (national average, for all purposes) is juxtaposed with the country's
inverse dependency ratio from 1955 to date. This figure shows, firstly, that the relative
abundance of young people coincided with sharply higher property prices. Secondly, in
contrast, the relative abundance of old people seems to be leading to lower property prices.
In the United States also, an increasing reverse dependency ratio coincided with the property
bubble (Fig. 4). After the bubble burst in 2007, property prices seem to have followed the
long run movement of the inverse dependency ratio, although it would be premature to draw
any conclusions from this at the moment. We see a similar pattern in the Irish and Spanish
experience (Figs. 5 and 6).
2
The period is known as the "Great Moderation" in the US case.
3
European Central Bank (2010) and Basel Committee on Banking Supervision (2011) provide a concise survey
of models with macro-financial linkage proliferating recently in this literature. Bianchi (2010), Jeanne and
Korinek (2010a, 2010b), and Stein (2011) focus on the credit externalities and pave the way for exploring the
effects of macro-prudential measures. In particular, Bianchi (2010) and Jeanne and Korinek (2010b) study
financial crises in open economies, aiming to provide macro-prudential remedial measures. However, there is
unfortunately relatively little from an Asian perspective. Exceptions include Hattori et al (2010), and Hahm et al
(2011).
4
I take these figures from Nishimura (2011b), which contains more figures about other European countries,
both core and periphery.
5
Empirical evidence suggests strongly that this is the case. See Takáts (2010) for property prices, and Liu and
Spiegel (2011) for equity prices. The Economist (2011) carries a readable account of this issue.
I am not suggesting that this demographic factor is the sole cause of the asset bubbles
that led to the crisis. There may be other factors, as for example in the case of Greece and
Portugal, who experienced "bubbles" in their public sectors rather than in asset prices, but
still faced the crisis. Likewise, there are other countries that underwent similar demographic
changes, and yet did not fall into crisis. I only want to point out that a favorable demographic
background (increasing inverse dependency ratio) might be fertile ground for the excessive
optimism6 that led economic agents in many countries to take a highly leveraged position to
boost their returns. In other words, asset bubbles might dance over the long-run tide of
demographic change.7 By the same token, the eventual sharp reversal of the ratio made
resolution of accumulated financial excesses particularly difficult, resulting in the prolonged,
severe balance-sheet adjustment that followed the crisis, and which is still under way.
Aftermath: severe balance sheet adjustment under population ageing
In order to determine the effect of balance sheet adjustments after the bursting of a
bubble, let me first clarify who leveraged during the bubble periods. In Japan, it was the
corporate sector, whose loans-to-GDP ratio increased by 29 percentage points in the ten
years before the bubble burst in 1991. In the United States, it was the household sector,
whose housing loans-to-disposable income ratio jumped by 39 percentage points in the ten
years before the bubble burst in 2007. These sectors were interest-sensitive, and thus
constituted the "transmission gears" of the ordinary monetary transmission mechanism in the
periods before the bubbles burst. However, after the bubbles burst, these leveraged sectors
became insensitive to policy rate reduction, because of the acute balance sheet adjustments.
This led to a breakdown in the ordinary monetary transmission mechanism. It should be
noted here that declining property prices greatly aggravated the balance sheet adjustments
of Japanese corporations and US households.8
In looking to the future, I would like to emphasize that the balance sheet adjustments
after the bubbles burst in Japan, the U.S. and the eurozone, whether private or public, must
be carried out, at a time when the population is ageing. This acute balance sheet adjustment
is unprecedented in our modern history of economic growth.
Where does Asia stand?
Asian economies and financial systems weathered the recent financial crisis relatively
well. Their recovery since 2009 has been markedly rapid, and emerging Asia is now a growth
engine of the global economy. The fiscal situation of emerging Asia is also far more favorable
than that of many developed countries. Furthermore, with the exception of Japan, Asian
economies have not yet faced serious problems with population ageing.
Nonetheless, I would like to point out future potential issues and the absolute necessity
of a prudent approach now. Let me draw your attention to the inverse dependency ratio
figures for China (Fig. 7) juxtaposed with those for Japan and the United States. The
Chinese ratio seems still to be rising rapidly, but will peak a bit later than in Euro-American
countries. The peak will be around 2010-15, after which it will decline as rapidly as it is now
rising. The inverse dependency ratios of many other Asian countries have a quite similar time
profile to that of China, and some are even more pronounced (Fig. 8).
Section 2. Macro-prudential policy - two "dos" and one "don't"
The recent financial crisis, as well as the Great Moderation leading up to the crisis,
brought to bitter recognition the gap between our macroeconomic and micro-prudential
policies. Thus, macro-prudential policy has come into the spotlight as something that would
fill this gap. However, we are still very much short of having a satisfactory macroeconomic
theory that deals adequately with complex and sometimes violent financial markets.
Consequently, the very definition of macro-prudential policy remains elusive, even three
years after the crisis. How are we to draw the lines between macroeconomic,
macroprudential and micro-prudential policies? What indicators are useful in detecting risks? What
should be the tools of macro-prudential policy? Should capital controls also be considered as
a part of macro-prudential policy tools? How are we to achieve the appropriate
burdensharing among monetary, macro-prudential and micro-prudential policies in order to maintain
financial stability? Since we do not yet have a satisfactory theory to give clear-cut answers to
these questions, I will take a more pragmatic approach and propose two "dos" and one
"don't" for prospective macro-prudential policies.
2.1. "Do" detect risks in advance - information and intelligence
In order to avoid another crisis and subsequent stagnation, it is critically important for
policymakers to detect undue risk accumulation. It should be noted that information
propagation always plays a critical role in the inception and transmission of systemic crisis.
Thus, "information" and "intelligence", or more precisely speaking, market intelligence, is of
the utmost importance both for risk detection and for crisis management. Here both
bottomup and top-down approaches are absolutely necessary.
Bottom-up information: market intelligence
The history of financial crises provides clear evidence that systemic crisis is often
ignited by the bankruptcy not of large firms, but of relatively small firms such as Sanyo
Securities in Japan (1997) and Northern Rock in the United Kingdom (2007) (Fig. 9). This
reveals one crucial aspect of financial intermediation, that is, information. Since financial
transactions are a collection of information flows, the failure of a small financial institution
may cause an immediate market-wide liquidity crisis or a "run", if the failure gives rise to
widespread fear or uncertainty in the market.
Thus, both in terms of risk detection and crisis prevention, market intelligence obtained
through face-to-face contacts and dialogue with market participants is critically important. In
this regard, most Asian central banks can boast of their grip on individual institutions'
activities and micro information in the market. Nonetheless, the increased sophistication and
innovation of financial services makes risk detection increasingly difficult. In some cases,
financial institutions themselves do not seem fully aware of the risks associated with their
investments and transactions, especially those related to structured products and derivatives.
Any complacency in terms of risk detection could itself be another source of risk, and
authorities should encourage market participants to continuously improve their risk
management skills. Painstaking information gathering, continuous updating and
openminded risk assessment are all about market intelligence.
In this regard, macro-prudential measures such as information exchange through the
publication of the Financial System [Stability] Report (FSR) have the potential to provide new
ways of utilizing information and market intelligence. Macro-prudential policies can be
effective only if they facilitate dialogue and coordination between market participants and
authorities, and also between macro- and micro-policies.
Top-down information: indicators for detecting macro risks and excesses
I would therefore like to turn now to macro risks and excesses and the indicators used
to detect them. In most cases of "bubble and burst", the large gyrations of financial markets
and the economy are driven by psychological swings: Economic entities are likely to become
excessively optimistic in bubble periods, and excessively pessimistic when those bubbles
burst. In economic boom periods, such as Japan's "Bubble Era" and during the "Great
Moderation", the co-existence of high growth and low inflation may lead to the illusion of
productivity growth and an expectation of continued low interest rates. Such optimism is
likely to induce a euphoric view of asset prices and an under-estimation of risks. One the
other hand, in a prolonged downturn, economic entities become excessively pessimistic,
leading to further deterioration of the economy, and thus their pessimism turns to be
selffulfilling. In order to avoid excessive accumulation of these risks, it is critically important to
detect any such extreme optimism or pessimism behind the developments indicated by
various financial data.
For such purposes, we should carefully avoid becoming a hostage to any particular
form of reasoning or theory. Although some indicators such as credit-to-GDP ratio and the
deviation of real estate prices from the trends may provide useful information, we do not
have any decisive indicators in this respect. The theory I have perused earlier is valuable in
explaining what has happened before, but is not so helpful in providing an indication of what
will happen in the future. Every crisis may take a different form. Excessive reliance on
specific indicators might cause us to miss important risks or misidentify nonexistent risks.
Moreover, we should take into account a variant of Goodhart's law:9 If a central bank
announces its intention to focus on specific indicators in order to take action to discourage
risk-taking, market participants might try to take risks without influencing these indicators,
and these indicators might eventually lose their information value. This problem would be
further intensified if we focused on a narrower range of indicators.
Thus, it would be wise for policymakers to monitor impartially a variety of indicators.
Moreover, we need to make full use of market intelligence in order to interpret various data
comprehensively, since price data themselves may not indicate whether they are in line with
fundamentals or driven by euphoria.
Bank of Japan's framework for detecting risks
Let me now explain the various efforts made by the Bank of Japan in this field. The
Bank executes both on-site examinations and off-site daily monitoring of a wide range of
financial institutions, including securities firms. Through such activities, the Bank, making full
use of market intelligence, tries to identify any signs of risk accumulation. The Bank also
maintains close dialogue with market participants such as the counterparties of market
operations.
Moreover, the Bank of Japan makes a regular comprehensive risk assessment of the
overall financial system, analyzing both macro data and micro information, and publishes its
assessment on financial stability in its semi-annual "Financial System Report". Moreover, the
Bank's assessments of the risks in the financial system are useful inputs to the
decisionmaking of monetary policy in the "Two Perspectives Framework" (discussed later).
The Bank of Japan is making efforts also in terms of exploiting wide-ranging data,
macro stress-testing and establishing econometric models incorporating the financial sector,
which is in line with the efforts of other central banks. In addition, two Bank of Japan
economists, Koichiro Kamada and Kentaro Nasu, have recently devised an innovative
system of Financial Cycle Indexes (FCIXs), which are designed to be early warning
indicators.10 These FCIXs are not based on a particular theory, but on the age-old analytic
tradition of economic trends and cycles. Although the jury is still out, the performance of
FCIXs seems to be promising: they predicted Japan's financial crisis, and warned of the
recent financial crisis about a year in advance (Fig. 10).
From my viewpoint, FCIXs would be useful tools for macro-prudential policies, since
they could provide early warning signals of excessive optimism or pessimism. Indeed, one of
the most difficult challenges for macro-prudential policy is how to spot excessive optimism or
pessimism, especially because we do not yet have a credible theoretical framework that can
be applied for such purposes. In this regard, the FCIX approach may be atheoretical in the
sense that it does not depend on a particular economic theory, but this is an advantage in
light of the unsatisfactory state of theory. Owing to such strengths as indicators, FCIXs would
contribute to effective monitoring of the financial system as a whole from the
macroprudential perspective.
2.2. "Do" avoid pro-cyclicality
Lean against the wind of financial risks: coordination of monetary and
macroprudential policy
I would now like to refer to another aspect of macro-prudential policy; that is,
macroprudential policy as a means to counter procyclicality.
After detecting undue risk accumulation, policymakers would be required to check
further accumulation of risks and to discourage risk-taking. On the other hand, if
policymakers find that market participants have become excessively risk-averse, they would
be called upon to restore confidence in the market. The basic principles are simple: Don't be
so lenient when things are booming, and don't be so restrictive when things turn sour. Here,
coordination of monetary and macro-prudential policy is necessary, and very effective.
In this regard, the Bank of Japan is making use of a "Two Perspectives Framework" in
its conduct of monetary policy. The framework involves a two-step policy consideration:
policy should be guided by the most probable scenario for the future course of the economy
(first perspective), but at the same time it should incorporate "remote risk factors" that might
affect the economy adversely if they happen to materialize, even though they may not be in
the main scenario (second perspective).11 The latter clearly includes systemic financial risks.
Thus, when it contemplates monetary policy, the Bank examines a broad range of
information, not only conventional indicators such as inflation, but also financial information
and market intelligence about risk accumulation. The Bank assesses such information in a
comprehensive manner, and communicates to the public its assessment of these tail risks.
Needless to say, there can be other styles of communication, such as conveying
central banks' risk assessment in terms of changes in their inflation forecasts over a long
horizon within their inflation-targeting frameworks. There is no clear-cut answer as to the
most suitable communication strategy, since the appropriate style of communication depends
upon the economic and financial structure of the particular jurisdiction. However, there is an
apparent need for financial risk assessment and its communication to the general public,
beyond conventional inflation assessment.
New regulatory framework and pro-cyclicality issues
Let me now take up the issue of the new regulatory framework and pro-cyclicality.
Indeed, one of the regular agenda items of recent international debates is how to address
pro-cyclicality in financial regulation. The Basel Committee has tried to address this issue in
Basel III, which incorporates a "capital conservation buffer" and "counter-cyclical buffer".
Here implementation is the key. Should banks conceive of the capital conservation
buffer as a part of the minimum capital requirement and maintain the buffer regardless of the
phase of the cycle, the introduction of the buffer might result in the banking sector holding
more capital than is optimal from the inter-temporal viewpoint.12 In order for Basel III to be an
optimal regulatory framework, not only from a static but also a dynamic perspective, it should
be implemented appropriately and accompanied by adequate supervision. This is all the
more true for the counter-cyclical capital buffer.
In a similar vein, we should be aware of the possible side-effects of a newly-introduced
Systemically Important Financial Institutions (SIFI) framework. Capital surcharges for
"additional loss absorbency" in the SIFI framework may lead to the risk that SIFIs keep more
capital than optimal on an inter-temporal basis, which may cause more acute credit
contraction in the midst of a recession. Moreover, there is the confounding factor of possible
deposit concentration in SIFIs. In the midst of Japan's financial crisis, we experienced a
substantial shift of deposits from small banks to money center banks. If a SIFI framework and
the capital surcharge make people believe that SIFIs are much safer than non-SIFIs, a SIFI
framework might even accelerate the shift of deposits in a stressed situation, but the
surcharge might discourage SIFIs from fully implementing the credit intermediation functions
formerly performed by non-SIFIs. Thus, we should carefully examine whether or not
newlyintroduced regulatory frameworks will actually counter procyclicality as expected.
2.3. "Don't" harm long-term efficiency
A new excuse for an old addiction?
That having been said, let me elaborate one "don't" of macro-prudential policy,
especially from a long-term perspective.
Since there is no clear definition of macro-prudential policies or of their policy tools, any
policy tool could be justified as a part of that policy. Thus, we have to be careful of the
danger of making macro-prudential policy "a new excuse for an old addiction", which often
leads to long-term inefficiency. Indeed, most of the tools often referred to as
"macroprudential policy tools", such as ceilings on loan-to-value (LTV) and debt-to-income (DTI)
ratios in property markets and capital controls in foreign exchange markets, cannot be free
from the risk of distorting asset allocation that leads to inefficiency in the long run. Thus,
policymakers should be required to examine carefully the consequences of each
macroprudential policy action from the long-run perspective. Long run consequences often develop
in a relatively short period of time, when addiction continues.
SIFI framework and long-term efficiency
It is important to design the SIFI framework in a manner compatible with incentives.
One of the root causes of the recent crisis was excessive risk-taking. If the SIFI framework
encourages SIFIs to pursue further the yield-searching originate-to-distribute model due to
the need to downsize balance sheets while maintaining their return on equity, the effect
might rather be to destabilize the financial system. In this regard, I would like to reiterate that
the SIFI framework should be a comprehensive package of effective regulation and
supervision sustainable in the long run.
Furthermore, the SIFI regulation will be counter-productive if it hinders SIFIs' core
financial intermediation. Since the demand for financial services is largely determined by the
needs of the real economy, any additional regulation imposed on SIFIs will reduce their
financial functions to some extent, or the financial intermediation performed by SIFIs will be
replaced by similar services offered by other entities. Thus, should there be a significant
difference between the regulatory burden imposed on SIFIs and that on non-SIFIs, financial
transactions might shift to less regulated entities and the risk underlying the financial system
as a whole might heighten. "Shadow banking" is a typical problem of this kind.
Asia should be well aware of these problems. First, emerging Asia is now at the center
of global economic growth. To sustain such growth, the need for fund intermediation is also
likely to increase. Hence, should new financial regulations hinder the core financial function
at a global level, the negative impact on the real economy could be all the more serious.
Second, some emerging Asian economies, where asset price hikes threaten to create
bubbles, have already adopted macro-prudential tools such as lowering the LTV and DTI
ratios of real estate-related loans. Accordingly, these countries should examine the costs and
benefits of their macro-prudential policy actions, and devise appropriate and timely exit
policies to avoid long-term inefficiency.
Section 3. Tail risks and false sense of security of macro-prudential measures
The recent financial crisis (the "financial tsunami"), and the tragic great earthquake in
Northern Japan (with its gigantic real tsunami), showed vividly that tail risks may materialize
in our life time, and thus they are not really tail risks anymore. Policy frameworks anticipating
only "ordinary" shocks within usual economic cycles may not be very effective in mitigating
the impact of such tail events when they actually materialize. The recent financial crisis in
particular has forced policymakers to review their own policy frameworks and to examine
how they could identify tail risks and deal with tail events.
Nonetheless, at this juncture we do not have fully reliable indicators for detecting tail
risks nor panaceas against the maladies that accompany these tail events. We have to bear
in mind that, no matter how intellectually-inspiring policy makers may find this new tool,
macro-prudential policy can never be a substitute for appropriate macroeconomic policy or
for effective financial supervision. Japan's experience of its bubble economy is a good
example. Japan learned just how difficult it is to control asset prices solely with
macroprudential tools such as an administrative ceiling on bank loans to the real estate sector.13
Thus, in detecting tail risks and tackling tail events, we have to avoid any complacency
or false sense of security in our macro-prudential policy framework. If we mistakenly believe
that we could discover excessive risk accumulation through observing specific indicators, or
that macro-prudential policies could be mightily effective in achieving financial stability, such
complacency could itself become another source of instability.
Let me illustrate the importance of avoiding a false sense of security, by telling you the
story of the world's deepest tsunami breakwater at Kamaishi port in northern Japan (Fig. 11).
At 1,960 meters long and 63 meters deep, it was celebrated as the deepest breakwater in
the world by Guinness World Records when it was completed in March 2009. Exactly
two years later, it was shattered by the force of a tsunami equivalent to the impact of
250 Jumbo jets flying at 1,000km/h; the very apotheosis of a real tail event.
With hindsight, we cannot deny that this seemingly indestructible tsunami breakwater,
and other facilities to ward off possible tsunami threats, gave us a sense of security. It might
lead us to underestimate the magnitude of the tail risk event of tsunamis and thus to ignore
the antique stone inscriptions warning of the devastation of tsunamis (Fig. 12). Hundreds of
these so-called tsunami stones, some more than six centuries old, dot the coast of Japan.
We now know the true cost of relying on this false sense of security.
Thank you for your attention.
Appendix: the financial cycle indexes
The Financial Cycle Indexes (FCIXs) developed by Kamada and Nasu (2011), are
used to monitor financial stability from the macro-prudential perspective. They are designed
specifically as an alternative to the early warning indicator introduced by Kaminsky and
Reinhart (1999).
Kamada and Nasu focus on the Juglar cycle - a cycle with a duration of 7 to 11 years -
included in financial time series, according to the result of analyzing the data compiled by
Laeven and Valencia (2010). The Juglar cycle is extracted from the original time series by
the HP-filter-based band pass filter,14 which consists of two HP filters with different
smoothness parameters, specifically and as defined below:
to extract cycles lasting longer than 7 years;
to extract cycles lasting longer than 11 years.
In both of the above, is the parameter used to adjust the formulae for the frequency
of an original time series. The Juglar cycle lasting 7 to 11 years is given by the difference
between the two HP trends obtained above.
The two financial crises are used to categorize data into leading and lagging indicators.
(a) January 1990: the triple sell-off in the yen, equity, and bond markets, which is
considered the beginning of the bursting of the asset-price bubble; and
(b) November 1997: the bankruptcy of Sanyo Securities, which is considered the
start of a series of financial institution bankruptcies
Data is called a leading indicator if the Juglar cycle extracted turns down before the
above two crises, or a lagging indicator if the extracted Juglar cycle turns down after the two
crises.
FCIXs comprise leading and lagging indexes. Kamada and Nasu propose
three different types of index: type D, C, and B. Here, we explain the type-D leading FCIX,
which is a diffusion index and constructed as follows:
,
where denotes the Juglar cycle extracted from a leading indicator; its first difference;
the number of leading indicators; and the index function, which takes on +1 if is
positive and -1 if is negative. The type-D lagging FCIX is obtained in a similar fashion.
FCIXs may not be very sensitive to a revival of financial activity, because they are designed
to detect signs of financial crisis. As the father of business cycle analysis, Arthur Spiethoff,
pointed out, the timing of recoveries is often ambiguous, compared with that of crises.
The Japanese FCIXs are constructed only from monthly, quarterly, and semi-annual
financial data that can be traced back at least to the mid-1980s. Kamada and Nasu have
found 8 leading indicators: stock prices of the banking, real estate, and construction sectors;
the lending attitude of financial institutions; the financial positions of firms; current profit levels
of firms; housing loans; and commodity prices. Some of the leading indicators are affected by
global shocks and enable the leading FCIX to detect financial crises prevailing in overseas
economies.
In contrast, Kamada and Nasu have found 11 lagging indicators: corporate debt;
household debt; lending interest rates; changes in interest rates on loans; the two monetary
ag