The role of monetary policy uncertainty in linking macroeconomic variables and stock volatility: Evidence from Japan

This article examines whether monetary policy uncertainty (MPU) affects the dynamic relationship between macroeconomic variables and stock volatility in Japan. Using a tree-based GARCH-MIDAS model, we identify a two-regime structure with MPU as the threshold, delivering high- and low- MPU regimes. In the high-MPU regime, heightened uncertainty amplifies indirect macroeconomic effects on stock volatility through the interest-rate expectation channel. While literature typically links MPU propagation first to bond market volatility, our study offers a distinct perspective tailored to Japan’s prolonged low-rate environment: equity variations become exceptionally sensitive to interest-rate expectations when MPU is high. These findings are reaffirmed by VAR analysis and remain robust when adding U.S. uncertainty spillovers. Our model also demonstrates superior long-horizon volatility forecasting. Overall, this article highlights the critical role of MPU in the response of volatility to macroeconomic variables through the interest-rate expectation channel.