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The Effects of the Exchange Rate on Japanese Firms' Investment: An Analysis with Firm-Level Data

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  • Masaki Hotei

    (Economist, Policy Research Institute, Ministry of Finance)

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    Abstract

    Although the effects of the exchange rate on firms' investment were mostly analyzed with semi-macro data by industry, in recent years analyses using firm-level panel data have been developed. Nucci and Pozzolo (2001) analyzed using Italian firm-level panel data and reported that an appreciation of the exchange rate has a negative effect on firms' investment as its export ratio is higher, whereas it has a positive effect on firms' investment as their import ratio is higher. Furthermore, the effects of the appreciation of the exchange rate on investment are stronger in firms with low market power and facing the financial constraints. This paper analyzes the effects of an appreciation of the yen on investment with Japanese firm-level panel data, and a similar result to Nucci and Pozzolo's (2001) was obtained. It also conducted a simulation using the empirical results and showed, in five industries with high export ratio, the real investment decreases by 0.45% to 0.95% point to 1% point appreciation of the real effective exchange rate, whereas in the industry of petroleum products and coal products, real investment increases by 1.36% point to 1% point appreciation of the real effective exchange rate.

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    File URL: http://www.mof.go.jp/english/pri/publication/pp_review/ppr019/ppr019d.pdf
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    Bibliographic Info

    Article provided by Policy Research Institute, Ministry of Finance Japan in its journal Public Policy Review.

    Volume (Year): 8 (2012)
    Issue (Month): 5 (November)
    Pages: 663-682

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    Handle: RePEc:mof:journl:ppr019d

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    Web page: http://www.mof.go.jp/pri/
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    Related research

    Keywords: investment; exchange rate; export ratio; import ratio;

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    1. Francesco Nucci & Alberto Pozzolo, 1998. "Investment and the Exchange Rate," Temi di discussione (Economic working papers) 344, Bank of Italy, Economic Research and International Relations Area.
    2. Jose Campa & Linda S. Goldberg, 1996. "Investment, pass-through, and exchange rates: a cross-country comparison," Staff Reports 14, Federal Reserve Bank of New York.
    3. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
    4. Kazuo Ogawa, 2003. "Financial Distress and Corporate Investment: The Japanese Case in the 90s," ISER Discussion Paper 0584, Institute of Social and Economic Research, Osaka University.
    5. Yoichi Matsubayashi, 2009. "Exchange Rate, Expected Profit, and Capital Stock Adjustment: Japanese Experience," Discussion Papers 0828, Graduate School of Economics, Kobe University.
    6. Campa, Jose & Goldberg, Linda S., 1995. "Investment in manufacturing, exchange rates and external exposure," Journal of International Economics, Elsevier, vol. 38(3-4), pages 297-320, May.
    7. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
    8. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
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