CIRJE-F-101. Fukuda, Shin-ichi and Takashi Onodera, "A New Composite Index of Coincident Economic Indicators in Japan: How can we improve the forecast performance? ", January 2001.

The purpose of this paper is to construct a new composite index of coincident economic indicators in Japan and to demonstrate their usefulness in forecasting recent short-run economic fluctuations. The method of construction is based on the single-index dynamic factor model. Our two types of indexes are highly correlated with the traditional composite index compiled by the EPA over business-cycle horizons. However, standard leading indicators, which failed to forecast the traditional composite index, make a satisfactory performance in forecasting our indexes in the 1990s. In addition, lagged values of our indexes help to improve the leading indicatorsf performance in forecasting the traditional composite index in the 1990s. The result is noteworthy because a large number of research institutes made serious errors in forecasting recent recessions in Japan.