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Effects of Economic Policy Uncertainty on Corporate Investment and Strategic Cash Holdings: Evidence from Japan

Ryosuke Fujitani, Masazumi Hattori and Yukihiro Yasuda

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: We empirically examine the effects of economic policy uncertainty (EPU) on the investment and cash holding behaviors of Japanese firms. We use the Japanese EPU index developed by Arbatli, Davis, Ito & Miyake (2019). They calculate the index based on the approach of Baker, Bloom & Davis (2016) as well as subcategories of EPU indices. We find that Japanese firms invest less and accumulate more cash when EPU becomes higher. We find that the uncertainty of fiscal and exchange rate policy are the key drivers of the negative impacts on corporate investment. However, we also find that exchange rate policy uncertainty only has short-term predictive power for investment. Additionally, we find that economic policy uncertainty in the US has negative spillover (contagion) effects on corporate investment in Japan. Our findings suggest that Japanese managers become more cautious in making investment decisions as a response to both higher US economic policy uncertainty and economic policy uncertainty in Japan.

Pages: 37 pages
Date: 2021-08
New Economics Papers: this item is included in nep-isf and nep-mac
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