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

Author

Listed:
  • Masaki Hotei

    (Economist, Policy Research Institute, Ministry of Finance)

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.

Suggested Citation

  • Masaki Hotei, 2012. "The Effects of the Exchange Rate on Japanese Firms' Investment: An Analysis with Firm-Level Data," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 8(5), pages 663-682, November.
    • Handle: RePEc:mof:journl:ppr019d
    as

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    References listed on IDEAS

    as
    1. Yoichi Matsubayashi, 2011. "Exchange Rate, Expected Profit And Capital Stock Adjustment: Japanese Experience," The Japanese Economic Review, Japanese Economic Association, vol. 62(2), pages 215-247, June.
    2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    3. Nucci, F. & Pozzolo, A.F., 1998. "Investment and the Exchange Rate," Papers 344, Banca Italia - Servizio di Studi.
    4. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    5. 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.
    6. Campa, Jose Manuel & Goldberg, Linda S, 1999. "Investment, Pass-Through, and Exchange Rates: A Cross-Country Comparison," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 287-314, May.
    7. 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.
    8. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.
    9. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
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    More about this item

    Keywords

    investment; exchange rate; export ratio; import ratio;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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