Regime-Dependent Synchronization of Growth Cycles between Japan and East Asia

Some studies indicate that correlations between GDP growth in Japan and in emerging East Asian countries are consistently positive; others claim that such correlations are consistently negative. In this analysis of 10 East Asian countries over 1975-2002 using quarterly GDP data, a Markov-switching vector autoregressive system with three growth cycle regimes is used to examine to what extent such correlations are sensitive to third-country effects, transmission mechanisms, and the quality of Japanese output data. After controlling for third-country effects, correlations with Japan are found to be almost uniformly negative. When transmission variables are taken into account, however, positive correlations appear during rapid-growth regimes for China, Malaysia, Singapore, Taiwan, and South Korea. When higher-quality Japanese output data are used, shocks in these countries are symmetric with Japan's disturbances in growth-recession and rapid-growth regimes. However, synchronization with Japan is never present in the normal-growth regime. Because these five countries are not fully synchronized with Japan, it is probably premature for them to engage in exchange rate arrangements involving the yen. Copyright (c) 2005 Center for International Development and the Massachusetts Institute of Technology.