Domestic and international effects of economic policy uncertainty on corporate investment and strategic cash holdings: Evidence from Japan

We empirically examine the effects of economic policy uncertainty (EPU) of which measurement methodology Baker, Bloom & Davis (2016) propose on the investment and cash holding behaviors of Japanese firms. We also examine spillover effects of EPU of the United States on them. We find that Japanese firms invest less and accumulate more cash when domestic EPU increases. Impacts of subcategories of domestic EPU differs: the uncertainty of fiscal and exchange rate policies are the key drivers of the negative impacts on corporate investment although the predictive power for investment of economic policy uncertainty of exchange rate holds only in the short run. As for the international spillover, we find that economic policy uncertainty in the United States has negative spillover (contagion) effects on corporate investment in Japan. Our findings suggest that Japanese managers become more cautious in making investment decisions as a response not only to higher domestic EPU but also US EPU.