Assessing macroeconomic forecasts for Japan under an asymmetric loss function

This paper examines the asymmetry of the loss functions of the Japanese government, the International Monetary Fund (IMF), and private forecasters for Japanese output growth and inflation forecasts. It tests the rationality of the forecasts, assuming a possibly asymmetric loss function. The results indicate considerable evidence of asymmetry. The 15-month forecasts are overpredicted, irrespective of forecaster identity or the target variable. However, the biases in the three-month forecasts vary among forecasters: the IMF provides prudent short-term forecasts for output growth and inflation, while private forecasters provide unbiased inflation forecasts. The government uses the information provided in the IMF and consensus forecasts efficiently when making its own forecasts. A comparison with the projections for the German economy indicates that the biases of the Japanese government may be attributable to its debt-to-GDP ratio, which is the highest among advanced economies.