The synchronization between Korea's and Japan's business cycles

Abstract

This article analyzes the evolution of the dynamic interactions between Korea's and Japan's business cycles. The logarithmic industrial production is first decomposed into trends and cycles using bounceback models. The estimation results of the two-state Markov switching model show that the synchronization coefficient of Korea–Japan is positive and time-varying. However, according to the estimation results of the heteroscedasticity-based VAR model, the Japanese business cycle shock has a positive effect on the contemporaneous Korean business cycle, but not vice versa. Based on these results, I estimate a TVP-VAR model assuming Cholesky decomposition and find that Japanese upward shocks do not have positive impacts on the Korean business cycle in the period before the global financial crisis or the period after the global financial crisis and before the COVID-19 outbreak. The response of Korea to the Japanese shock is smaller in the three-variable TVP-VAR compared to the two-variable TVP-VAR without the United States. The Korean business cycle upward shock also has a similar effect on the Japanese business cycle, albeit smaller, depending on the period. Overall, the size of the response seems to be closely related to global events as well as changes in trade, FDI, and political conditions between two countries.