External Shocks and Japanese Business Cycles: Evidence from a Sign-Restricted VAR

This paper investigates the sources of Japanese business fluctuations since the 1990s taking into account both external shocks (e.g., risk premium and foreign demand shock) and domestic supply and demand shocks. We use the sign-restricted VAR model based on the theoretical model to identify these. The presented results show that 20% to 40% of the forecast error variances in output can be explained by external shocks. Further, we demonstrate that supply shocks are the main influencing factor in Japanese business fluctuations throughout the sample period and that risk premium shocks have played an important role in post-2008 Lehman shock recession.