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