The Japanese yen is one of the most volatile among developed country currencies. In this paper, we investigate how real effective exchange rate (REER) uncertainty affects firms’ research and development (R&D) investment, using firm‐level panel data for Japanese manufacturing firms for the period 1994–2011. Our results show that firms that are more exposed to REER uncertainty are less responsive to changes in demand conditions. Uncertainty makes firms more cautious when investing, since high uncertainty increases the chances of making a costly mistake. Our finding thus provides evidence of the caution effect of uncertainty. The caution effect also increases the persistence of R&D, implying that R&D investment does not increase much even if firms face favorable demand conditions. Reducing REER uncertainty is important to stimulate R&D investment, especially for firms that are more exposed to international competition and REER uncertainty.