Taxes and Corporate Investment in Japanese Manufacturing

45 Pages Posted: 14 Jan 2001 Last revised: 17 Oct 2022

See all articles by Fumio Hayashi

Fumio Hayashi

National Graduate Institute for Policy Studies; GRIPS

Date Written: October 1985


This paper examines the impact of taxes on the incentive to invest for the Japanese manufacturing sector in the postwar period. The idyosyricratic feature of the Japanese corporation tax system as compared to the U.S. is the prevelence of tax-free reserves and the tax deductibility of a part of taxes paid by corporations in the previous year. Our formula for the tax-adjusted Q and the cost of capital incorporates this. The main conclusions areas follows. While the postulated negative relation with the cost of capital cannot be found, investment in Japanese manufacturing shows until 1974 a strong association with the tax-adjusted Q. Since the change in stock prices, not taxes, is the primary source of changes in Q, the profitability of capitalis the major determinant of investment.

Suggested Citation

Hayashi, Fumio, Taxes and Corporate Investment in Japanese Manufacturing (October 1985). NBER Working Paper No. w1753, Available at SSRN:

Fumio Hayashi (Contact Author)

National Graduate Institute for Policy Studies ( email )

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