The term structure of interest rates in Japan: the predictability of economic activity

This paper examines whether the yield spread between long- and short-term interest rates contains information about future economic activity in Japan, and whether the nature of this relationship changes with time. The results firstly indicate a break point in the relationship between interest rates and economic activity. The yield spread is then split into two factors: expected future changes in short rates, and the term premium. Analysis is made concerning which of these factors contains information about future economic activity. The results indicate that the first factor contains information over time, even though the term premium has changed.