The Effects of the Exchange Rate on Japanese Firms' Investment: An Analysis with Firm-Level Data

Although the effects of the exchange rate on firms' investment were mostly analyzed with semi-macro data by industry, in recent years analyses using firm-level panel data have been developed. Nucci and Pozzolo (2001) analyzed using Italian firm-level panel data and reported that an appreciation of the exchange rate has a negative effect on firms' investment as its export ratio is higher, whereas it has a positive effect on firms' investment as their import ratio is higher. Furthermore, the effects of the appreciation of the exchange rate on investment are stronger in firms with low market power and facing the financial constraints. This paper analyzes the effects of an appreciation of the yen on investment with Japanese firm-level panel data, and a similar result to Nucci and Pozzolo's (2001) was obtained. It also conducted a simulation using the empirical results and showed, in five industries with high export ratio, the real investment decreases by 0.45% to 0.95% point to 1% point appreciation of the real effective exchange rate, whereas in the industry of petroleum products and coal products, real investment increases by 1.36% point to 1% point appreciation of the real effective exchange rate.