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

Iwata, Yasuharu (2026): Public Signal Discounting: Fiscal Policy, Exchange Rates, and Firm-Level Decisions in Japan.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Survey data; Expectation formation; Fiscal policy; Zero lower bound; Uncovered interest parity; Safe-haven currency
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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