Interest Rate Sensitivity of Capital Investment in Japan: An Analysis Using Panel LP-IV

This paper examines the interest rate sensitivity of capital investment in Japan. We first summarize recent global trends using macro-level statistics from advanced economies. Using firm-level financial survey data for Japanese firms, we then demonstrate how structural changes surrounding Japanese firms, such as the increase in intangible asset investment and overseas capital investment, affect interest rate sensitivity, employing a method called Panel LP-IV (Local Projection Instrumental Variables). The analysis yields several key findings: first, the interest rate sensitivity of capital investment has shown a declining trend in recent years globally. Second, intangible asset investment has a low interest rate sensitivity; consequently, firms with a higher proportion of intangible assets in their aggregate capital investment are less sensitive to interest rate changes compared to firms with a lower proportion. Last but not least, declining growth expectations and increasing labor shortages can additionally depress interest rate sensitivity. While firms with a higher overseas investment ratio showed a lower interest rate sensitivity for tangible asset investment domestically compared to firms with a lower overseas investment ratio, this difference is not statistically significant.