Policy Uncertainty In Japan

Abstract

for very useful comments and suggestions and Yihan Liu for excellent research assistance. We are especially grateful to Ikuo Saito, who was a coauthor on an earlier draft. Steven J. Davis gratefully acknowledges financial support from the U.S. National Science Foundation and the Booth School of Business at the University of Chicago. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The Dynamic Effect of Uncertainty on Corporate Investment through Internal and External Financing

“…Equations (9) and (10) show that the marginal and long-run effects depend on the lagged cautionary effect a 0u and financial interaction effect b ku as well as the level of uncertainty in the initial period t. Importantly, if the lagged cautionary effect has a negative value, this implies that high uncertainty reduces the dynamic response of corporate investment to a change in the financing variables and promotes a firm's unresponsiveness to financing conditions. If the financial interaction term has a positive (negative) value, it means that the high uncertainty increases (decreases) the dynamic causal link between corporate investment and financing conditions.…”

“…The VIXJ is provided by the Center of the Study of Finance and Insurance and is in strict accordance with the Chicago Board Options Exchange approach underlying the VIX. The EPUJ is the time-varying news-based index of Japanese economic policy uncertainty developed by Arbatli et al (2017) and it is based on the frequency of articles in a country's major newspapers that focus on uncertainty about future economic policy, as proposed by Baker et al (2016). We convert monthly data on the VIXJ and EPUJ into quarterly data by taking the average to estimate the uncertainty shocks, as we discuss in the next subsection.…”

“…That is, although R&D is longer-lasting than capital investment, but less negatively affected by the shortage of cash flows (i.e., external funding constraints) under high uncertainty, these two types of corporate investments share evidence that high uncertainty amplifies the dynamic response to a shock to the internal financing source because of the cautionary effect to a lesser extent. Table 5 shows the long-run effect of a financing shock on corporate investment and R&D using the firm-level uncertainty shock (see equation (10) in Section 4.1 for the long-run effect). As shown in panel (a) for capital investment, the long-run effect of an internal financing shock to cash flows is much smaller under high uncertainty than under low uncertainty, indicating that as uncertainty increases, the importance of internal financing (i.e., financing constraints) becomes smaller in making capital investment decisions.…”

“…We use the same instrumental variables as described in the note of Table 2. Note: We measure the long-run effects of marginal changes in the financing variables on capital investment and R&D investment, as represented in equation (10), using the parameter estimates of the zero-lag models in Tables 2 and 3. The 10th percentile value of the firm-level uncertainty shock is defined as the low uncertainty shock, while the 90th percentile value is defined as the high uncertainty shock.…”

Effects of COVID-19 Pandemic on International Capital Markets

“…Turbulent periods in the markets have significant implications for the behavior of agents (Brogaard and Detzel, 2015). Studies show that periods of high uncertainty compromise economic performance, affecting stock markets (Arbatli et al, 2017), result in reduced returns (Baker et al, 2012) and increased volatility (Arouri et al, 2016).…”