RIETI Report May 2017

Rising Policy Uncertainty in the United States and the United Kingdom: Japanese companies may hold back on direct investment

The unpredictability and uncertainty of the future course of the global economy has been a frequently discussed issue recently, with developments including the advent of the Donald Trump administration that embraces the "America First" policy and the United Kingdom's decision to break away from the EU raising concern about how they will affect Japanese companies operating in or planning to enter their markets. Furthermore, uncertainty is also growing over China's economic policy. In the May issue of the RIETI Report, we present the column "Rising Policy Uncertainty in the United States and the United Kingdom: Japanese companies may hold back on direct investment" by Fellow Hongyang Zhang who reviews the relationship between the degree of uncertainty in overseas markets and Japanese companies' operations in overseas markets, with a particular focus on their advancement into overseas markets as measured by foreign direct investment (FDI).

Zhang first explains how the degree of policy uncertainty is measured via the Economic Policy Uncertainty (EPU) index developed by U.S. economists, and reviews its application in recent cases in the United States and the United Kingdom which indicate that uncertainty about the future has an inhibiting effect on Japanese FDI. Zhang also introduces his research findings on uncertainty and Japanese FDI in China, in light of the anti-Japanese demonstrations after the territorial dispute over a chain of islands. As policy uncertainty has a significant impact on the real economy, both uncertainty about economic policy at home and economic and diplomatic policy uncertainty abroad pose serious economic consequences. Economic and diplomatic policy stability in host countries is becoming all the more important for Japanese companies expanding overseas operations.

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Rising Policy Uncertainty in the United States and the United Kingdom: Japanese companies may hold back on direct investment

ZHANG HongyongFellow, RIETI

Lately, people have been talking often about the unpredictability and uncertainty of the future course of the global economy. The advent of the Donald Trump administration that embraces the "America First" policy and the United Kingdom's decision to break away from the European Union (EU) have raised concern about how these developments will affect Japanese companies operating in or planning to enter the U.S. and European markets. Uncertainty is also growing over China's economic policy.

In this article, I would like to consider the relationship between the degree of uncertainty in overseas markets (chiefly regarding government policies in countries in which Japanese companies operate) and Japanese companies' operations in overseas markets. In particular, I will focus on their advancement into overseas markets as measured by foreign direct investment (FDI).

To begin with, how can we measure the degree of policy uncertainty? As an indicator specifically designed to measure policy uncertainty, we can cite the Economic Policy Uncertainty (EPU) index developed by Northwestern University Associate Professor Scott R. Baker, Stanford University Professor Nicholas Bloom, and University of Chicago Professor Steven J. Davis.

To read the full text
http://www.rieti.go.jp/en/papers/contribution/zhang-hong-yong/01.html

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