Economic Policy Uncertainty and Cash Holdings: Evidence from Japan

Economic Policy Uncertainty (EPU) refers to the uncertainty surrounding government policies and their potential impact on the economy.This uncertainty arises from a lack of clarity regarding future policies related to fiscal measures, monetary policies, regulations, trade policies, and political events.Economic policy uncertainty typically leads firms to increase their cash holdings as a way to manage risk and maintain operational flexibility.Using the sample from the Nikkei 225 index listed non-financial firms in Japan, this paper examines the impact of EPU on corporate cash holding from 2003 to 2023 The paper finds a significant positive impact of the EPU on cash holding.Various robustness checks also confirm this baseline finding.This evidence is in line with the theory of liquidity preference provided by John Maynard Keynes.