Regime-dependent synchronization of growth cycles between Japan and East Asia*

The sign of correlations between GDP growth in Japan and in emerging East Asian countries is ambiguous. Previous work found either consistently positive or consistently negative correlations. We propose using an integrated framework where cross-country correlations depend on the phase of the business cycle. For ten East Asian countries over 1975-2002 with quarterly GDP data, we consider a three-regime growth cycle setting in order to allow for catching-up effects. We examine to what extent correlations are sensitive to third country effects, transmission mechanisms and the quality of Japanese output data. When controlling for thirdcountry effects correlations with Japan are almost uniformly negative. By contrast, when we take into account transmission variables, positive correlations appear during rapid-growth periods for a core-group of five East Asian countries composed of China, Malaysia, Singapore, Taiwan, and Korea. With higher quality data for output growth in Japan, symmetry of disturbances with Japan appears for the same group of countries in both growth-recessions and rapid-growth regimes. However synchronization with Japan is never present in the normal-growth regime. Since this core group of five countries is far from being fully synchronized with Japan, it may be somewhat premature even for them to engage in exchange rate arrangements involving the yen.