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Domestic and international effects of economic policy uncertainty on corporate investment and strategic cash holdings: Evidence from Japan

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  • Fujitani, Ryosuke
  • Hattori, Masazumi
  • Yasuda, Yukihiro

Abstract

We empirically examine the effects of economic policy uncertainty (EPU) of which measurement methodology Baker, Bloom & Davis (2016) propose on the investment and cash holding behaviors of Japanese firms. We also examine spillover effects of EPU of the United States on them. We find that Japanese firms invest less and accumulate more cash when domestic EPU increases. Impacts of subcategories of domestic EPU differs: the uncertainty of fiscal and exchange rate policies are the key drivers of the negative impacts on corporate investment although the predictive power for investment of economic policy uncertainty of exchange rate holds only in the short run. As for the international spillover, we find that economic policy uncertainty in the United States 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 not only to higher domestic EPU but also US EPU.

Suggested Citation

  • Fujitani, Ryosuke & Hattori, Masazumi & Yasuda, Yukihiro, 2023. "Domestic and international effects of economic policy uncertainty on corporate investment and strategic cash holdings: Evidence from Japan," Journal of the Japanese and International Economies, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:jjieco:v:69:y:2023:i:c:s0889158323000278
    DOI: 10.1016/j.jjie.2023.101272
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    Cited by:

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    2. Enomoto, Masahiro & Jung, Boochun & Rhee, S. Ghon & Shuto, Akinobu, 2024. "The impact of accounting quality on investment efficiency: Evidence from the 2001 bank shareholding limitation act of Japan," Japan and the World Economy, Elsevier, vol. 72(C).
    3. Cristian Barra & Pasquale Marcello Falcone, 2024. "Unraveling the impact of economic policy uncertainty on environmental efficiency: How do institutional quality and political orientation matter?," Economics and Politics, Wiley Blackwell, vol. 36(3), pages 1450-1490, November.
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    5. Sakurai, Hiroaki, 2025. "Business Sentiment of Japanese Companies and Wages in Thailand," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 32(1), January.
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    More about this item

    Keywords

    Economic policy uncertainty; Corporate investment; Real option; Cash holding;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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