Time and frequency co‐movement between economic policy uncertainty and inflation: Evidence from Japan

• Published date: 01 December 2022
• Author: Seyed Alireza Athari,Dervis Kirikkaleli,Imran Yousaf,Shoaib Ali
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2779

RESEARCH ARTICLE

Time and frequency co-movement between economic policy

uncertainty and inflation: Evidence from Japan

Seyed Alireza Athari

1

| Dervis Kirikkaleli

2

| Imran Yousaf

3

| Shoaib Ali

4

1

Department of Business Administration,

Faculty of Economics and Administrative

Sciences, Cyprus International University,

Northern Cyprus, Turkey

2

Department of Banking and Finance, Faculty

of Economics and Administrative Sciences,

European University of Lefke, Lefke, Northern

Cyprus, Turkey

3

Namal University, Mianwali, Pakistan

4

Air University School of Management Air

University, Islamabad

Correspondence

Seyed Alireza Athari, Department of Business

Administration, Faculty of Economics and

Administrative Sciences, Cyprus International

University, Northern Cyprus, Turkey.

Email: ali_athari@yahoo.com,sathari@ciu.

edu.tr

This study examines the time-frequency causal link between economic policy uncer-

tainty and inflation in Japan while answering the following questions: (i) is there any

causal link between economic policy uncertainty and inflation in Japan? (ii) if yes, in

which direction(s)? To the best of our knowledge, this is the first study that conducts

this nexus. To do so, this study employs the wavelet coherence causality test and

focuses on the wide range period from 2003:03 to 2021:03, in which Japan was

experienced the specific Quantitative and Qualitative Monetary Easing Policies.

Overall, the findings mirror that economic policy uncertainty is an essential predictor

of inflation in Japan, and economic policy uncertainty leads to inflation at different

periods and frequencies. The results of this study are crucial for policy decision-mak-

ing, monetary authorities, and central banks, and Japan should reduce uncertainty

about economic policies to curb the possible risk of inflation rises. The policymakers

in Japan can control the inflation rate fluctuation if they can ensure a more reliable

prediction of economic policies.

KEYWORDS

economics policy uncertainty, inflation, Japan, wavelet coherence

1|INTRODUCTION

The policy-related economic uncertainty known as economic policy

uncertainty (hereafter, EPU) has a significant adverse impact on the

overall economic basics. In particular, EPU has become an outstanding

role in the overall economic uncertainty detected during the subprime

mortgage crisis and economic recovery and growth afterward. Federal

Open Market Committee (2009) and the International Monetary

Fund, IMF (2012,2013) confirmed that U.S. and European uncertainty

policies had a substantial role in a sharp economic deterioration during

the crisis and sluggish recoveries subsequently. Over the past three

decades, the link between EPU and macroeconomic fundamentals has

considerably drawn macroeconomists' interests.

1

Empirical findings

supported a rise in EPU linked with lower rates of growth (Baker

et al., 2016; Bloom, 2009), employment (Baker et al., 2016;

Bloom, 2009), and also an investment (Bernanke, 1983; Bloom, 2009;

Rodrik, 1991; Wang et al., 2014). Bernanke (1983) argued that com-

panies are more likely to delay investment projects when the level of

economic uncertainty is high. Subsequently, the higher policy uncer-

tainty in the economy may cause the fluctuation of INF and increase

the hesitation of both investors (e.g., production and investment deci-

sions) and households (e.g., saving and consumption decisions). It is

also remarkable that a rise in EPU is associated with decreasing

investment rates and economic growth (Fernández-Villaverde

et al., 2015; Gilchrist et al., 2014).

Moreover, several studies have specifically tested the impact of

EPU on economic sectors such as financial (Athari, 2021a;

Athari, 2021b; Athari & Bahreini, 2021), tourism (Akadiri et al., 2020;

Irani et al., 2021; Uzuner et al., 2020), and agriculture sectors (Alola &

Uzuner, 2020). For instance, the study findings by Athari (2021a) rev-

ealed that global EPU adversely impacts Ukrainian banks' profitability.

In another study, Athari (2021b) showed that global EPU has a signifi-

cant negative effect on Nigerian banks' dividend payouts policy. While

several studies have focused on the causal link between EPU and

macroeconomic fundamentals, there is a considerable gap in the

1

Several studies examined the effect of other factors such as government expenditure and

public expenditure on economic activities (Onifade et al., 2020b; Uzuner et al., 2017).

Received: 28 August 2020 Revised: 22 August 2021 Accepted: 4 October 2021

DOI: 10.1002/pa.2779

J Public Affairs. 2022;22(Suppl. 1):e2779. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons Ltd. 1of10

https://doi.org/10.1002/pa.2779