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Exchange Rate, Expected Profit, and Capital Stock Adjustment: Japanese Experience

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  • Yoichi Matsubayashi

    ()
    (Graduate School of Economics, Kobe University)

Abstract

This paper empirically investigates the impact of exchange rate shocks on corporate investment. An intertemporal optimization model is developed in which an individual corporation in an open economy adjusts its capital stock according to the Tobinfs q, which represents the future stream of the profit rate and changes by the real exchange rate. By explicitly considering the marginal q, the transmission mechanism from real exchange rate shocks to investment dynamics via expected profitability is examined based on the Vector Autoregressive model. Empirical evidence suggests that the depreciation of the Japanese yen increases the expected profitability of the firm and stimulates corporate investment, especially in the machinery sector. This characteristic basically corresponds to the structure of external exposure and offers an important finding from the viewpoint of Japanese macroeconomic fluctuations.

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File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2008/0828.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Graduate School of Economics, Kobe University in its series Discussion Papers with number 0828.

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Length: 40 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:koe:wpaper:0828

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Web page: http://www.econ.kobe-u.ac.jp
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Keywords: Intertemporal Optimization; Marginal q; Pass-Through; Export Exposure;

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Cited by:
  1. 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.

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