International transmission of Japanese monetary shocks under low and negative interest rates: A global factor-augmented vector autoregressive approach

We examine the implications of Japanese monetary shocks under recent very low and sometimes negative interest rates to the Japanese economy and three of its major trading partners: Korea, China and the United States. In particular, we investigate the implications of shocks to the 2-year Japanese government bond rate in a series of factor-augmented vector autoregressive (FAVAR) models, in which both local and global conditions are proxied by latent factors generated from domestic economic indicators and weighted indicators of major trading partners, respectively. Our results suggest that shocks to 2-year Japanese government bond rates have substantive impacts on Japanese economic activity and inflation in conditions of low or even negative short-term rates. However, we find only modest global spillovers from Japanese monetary policy shocks compared to innovations in 2-year US Treasury yields over the same period.