This paper investigates pricing by Japanese manufacturing firms in export and domestic markets. The paper reports equations explaining the margin between export prices in yen and domestic prices for a wide range of final goods including many of the electronic and transport products which have figured so prominently in recent trade discussions. Evidence is presented showing that Japanese firms respond to changes in real exchange rates by "pricing to market", varying their export prices in yen relative to their domestic prices.The empirical specification makes it possible to disentangle planned changes in the margin between export and domestic prices from inadvertent changes in this margin due to unanticipated changes in exchange rates. The degree of pricing to market varies widely across products, but there is strong evidence that pricing to market occurs. The paper also investigates whether pricing to market has increased in scale in the period since 1985 when the yen began a sustained appreciation, but finds that only five of seventeen products experienced a shift in price behavior over that period.
Firms differ in the extent to which they "pass through" changes in exchange rates into foreign currency prices and in their "exposure" to exchange rates-the responsiveness of their profits to changes in exchange rates. Because pricing affects profitability, a firm's pass-through and exposure should be related. This paper develops models of exporting firms under imperfect competition to study these related phenomena. From these models we derive the optimal pass-through decisions and the resulting exchange rate exposure. The models are estimated on eight Japanese export industries using both the price data pass-through and financial data for exposure. EXCHANGE RATES CAN HAVE A MAJOR inf luence on the pricing behavior and profitability of exporting and importing firms. Firms differ in the extent to which they "pass through" the change in exchange rates into the prices they charge in foreign markets. They also differ in their "exposure" to exchange ratesthe responsiveness of their profits to changes in exchange rates. Previous papers have studied either pass-through or exposure, but none has studied these two phenomena together. Yet, because pricing directly affects profitability, the exposure of a firm's profits to exchange rates should be governed by many of the same firm and industry characteristics that determine pricing behavior. This paper develops models of firm and industry behavior that are used to study these closely related phenomena together. It also provides estimates of pass-through and exposure behavior using data from Japanese export industries.To examine pass-through behavior and exchange rate exposure, we model a firm with sales to a foreign export market. This exporting firm competes with a foreign firm in that export market. The costs of the exporting firm are based primarily in the local~domestic! currency, while the foreign firm
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