The purpose of this research was to investigate the relationship between real effective exchange rates and inward foreign direct investment in the East Asia and Pacific region and examine whether Japan had a higher response to real effective exchange rate volatility than other countries in the region. The research was motivated by the empirical evidence that Japan has a lower-than-average rate of inward foreign direct investment compared to its gross domestic product for the region, as well as a higher-than-average level of real effective exchange rate volatility. The sample included 21 countries and regions in the East Asia and Pacific region (1993 to 2022). Analysis included descriptive statistics, t-tests, and linear regression. The t-tests confirmed that Japan had significantly higher real effective exchange rate volatility and significantly lower inward foreign direct investment flows. Linear regression analysis showed that real effective exchange rate volatility had a negative effect on inward foreign direct investment flows, although this effect was only significant in some conditions. The regression analysis also showed that there was a significant negative effect from the Japan dummy variable, indicating that inward foreign direct investment flows were significantly lower in Japan compared to other countries. The implication of this research is while inward foreign direct investment is significantly lower in Japan than the regional average, exchange rate volatility is not the underlying causal mechanism. Therefore, more research is needed to investigate Japan’s inward foreign direct investment flows.
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