What Types of Policy Uncertainties Matter for Business?

• Author: Masayuki Morikawa
• DOI: http://doi.org/10.1111/1468-0106.12196
• Date: 01 December 2016
• Published date: 01 December 2016

WHAT TYPES OF POLICY UNCERTAINTIES MATTER

FOR BUSINESS?

MASAYUKI MORIKAWA*Research Institute of Economy, Trade and Industry

(RIETI)

Abstract. This paper reports data from the author’s original survey of Japanese companies concerning

the distributions on subjectiveuncertainties over economic policies and their effects on business oper-

ations. Companies perceive uncertainty over the future course of certain economic policies, such as

the social security system and internationaltrade policy. Policy uncertainty regarding the tax system,

trade policy and environmental policy can have substantialeffects on managerial decisions, especially

on equipment investment and overseasactivities. According to the companies’subjective probability

distributions on their sales outlook, manufacturers face greater uncertainty than non-manufacturing

companiesdo. Uncertainty over economic policies substantiallyreduces the expected sales growth rate.

1. INTRODUCTION

A large number of theoretical and empirical studies have been conducted on the

negative impacts of uncertainty on the real economy. While uncertainty about

the future economy arises for various reasons, unstable politics and unpredict-

able policies are important sources of uncertainty. Recent studies indicate that

policy uncertainty has a substantial negative impact on the real economy. These

studies depend on a single aggregated proxy measure of policy uncertainty. This

is, however, unsatisfactory because the behaviour of economic agents is affected

by various types of policy uncertainties at one time on, for example, corporate

tax, international trade, social security and labour market policies.

The first contribution of this study is to build a new data set. This data set cap-

tures the relationship between uncertainties over a variety of economic policies

and their impacts on managerial decisions, which has not been attempted in

the existing literature. Another feature of this data set is that it captures a com-

pany manager’s view on point estimates for sales outlook as well as the man-

ager’s individual belief on the distribution of future sales. More specifically,

this study asks about subjective 90% confidence intervals on sales outlook along

with point outlook for the subsequent year and the 3-year average.1

As the second contribution, the data design of this paper shows that different

policy uncertainties influence different companies’managerial decisions, thereby

*Address for Correspondence: Research Institute of Economy, Trade and Industry (RIETI), 1-3-1

Kasumigaseki, Chiyoda-ku, Tokyo 100-8901, Japan. E-mail: morikawa-masayuki@rieti.go.jp. This

paper is a revised version of my discussion paper (Morikawa, 2013). The author would like to

thank the editor, an anonymous reviewer, Masahisa Fujita, Arata Ito, Minoru Kaneko, Satoshi

Miura, Atsushi Nakajima, Keiichiro Oda, Munehisa Yamashiro, Isamu Yamauchi, and the seminar

participants at RIETI for their helpful comments and suggestions. The views expressed in this paper

are my own and do not represent those of REITI. This research is supported by the JSPS Grants-in-

Aid for Scientific Research (23330101, 26590043).

1See Guiso and Parigi (1999) and Bontempi et al. (2010) for studies that adopt data with a similar

design.

Pacific Economic Review, 21: 5 (2016) pp. 527–540

doi: 10.1111/1468-0106.12196

© 2016 John Wiley & Sons Australia, Ltd

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