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Public Signal Discounting: Fiscal Policy, Exchange Rates, and Firm-Level Decisions in Japan

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  • Iwata, Yasuharu

Abstract

Despite large-scale fiscal stimulus amid constrained monetary policy, Japan did not emerge from its prolonged deflationary period until sharp yen depreciation took hold. Using firm-level data, this paper examines the role of public signals in firms' expectation formation and decisions, with a focus on fiscal stimulus announcements and exchange rate dynamics. We find that growth and inflation expectations underreact to fiscal signals, resulting in only a negligible effect on investment and pricing decisions. Yen movements are driven primarily by time-varying risk premia, and depreciation expectations play no independent role in firm decisions. Firms respond mainly to realized exchange rate outcomes and expected cost conditions, consistent with Japan's recent cost-push-driven emergence from deflation.

Suggested Citation

  • Iwata, Yasuharu, 2026. "Public Signal Discounting: Fiscal Policy, Exchange Rates, and Firm-Level Decisions in Japan," MPRA Paper 129006, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:129006
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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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