New estimates of exchange rate pass‐through in Japanese exports

Abstract

Recently, the issue of a decline in exchange rate pass-through has gained much more attention. Taylor conjectures that a worldwide decline in exchange rate pass-through is related to the low and stable inflation in many industrialized countries since the early 1990s. Developments of 'new open-economy macroeconomics' also cast renewed attention on exchange rate pass-through. Theoretical research shows that the choice of an optimal exchange rate regime and the transmission of monetary policy impacts depend crucially on the exporter's price setting behaviour. There are many studies on the pass-through of Japanese exports, yet most studies simply use the industry-breakdown data on export price indices, which is insufficient to assess pass-through patterns in regional trade. Significantly, highly disaggregated (HS 9-digit level) commodity data are used here to evaluate the extent of pass-through by commodity and by destination. We investigate and compare the extent of pass-through to East Asia, Europe, and the US. We also examine whether there is any difference in the degree of pass-through in the pre-and post-Asian crisis era. Results suggest the most pricing-to-market (PTM) occurs in exports to the US market followed by significant, but less PTM in Europe. Virtually no PTM is found in Japanese exports to East Asia. Also, there is no clear evidence of either increasing or decreasing pass-through over time.

The Renminbi Rises

“…This is consistent with PTM behaviour (Parsons and Sato 2008). This behaviour has also been extended to the Japanese firms' Asian network.…”

Has pass-through to export prices risen? Evidence for Japan

“…Moreover invoicing patterns for Japanese exports show considerable regional variation, with particularly high dollar ratios for exports to the US and Southeast Asia (Sato, 2003). Parsons and Sato (2008) cite the latter use of the dollar as a possible explanation for their finding of an insignificant export price response to changes in the bilateral value of the yen to destination currencies in Southeast Asia. These invoicing practices mean that trade-weighted effective exchange rate measures need not capture the movements in the yen relative to the relevant contract currencies.…”

“…However the evidence of declining pass-through places it in the 1990s. Moreover, the Asian Crisis in 1997-1998 could have been a catalyst for a change in Japanese export price behavior, particularly for exports destined for regional markets (Parsons and Sato, 2008;Uctum, 2003;Vigfusson et al, 2007). Uctum tests for changes in the exchange rate response at the time of the Asian Crisis and two other break dates, reporting several instances of statistically significant changes but concluding that their impact on the long-run response is so small in magnitude as to be economically insignificant.…”

“…The resulting exchange rate series accurately track the value of the yen against those currencies used for invoicing in each sector. This is of particular importance in the case of Japan, where a substantial share of exports is not invoiced in yen and third-country currencies, especially the US dollar, are frequently used in contracts (Parsons and Sato, 2008;Sato, 2003).…”

Time varying pass-through: Will the yen depreciation help Japan hit the inflation target?

“…Theoretically speaking, if people have rational expectations, a monetary authority, by firmly pre-committing itself to a monetary expansion in a future time when the zero bound no longer 3 On the export side, Parsons and Sato (2008) who utilize a very detailed data set on Japanese export prices. Also on the export side, Yoshida (2010) utilizes Japanese export price data at the local port level: he finds that there is a fair amount of heterogeneity across the ports with respect to responses of export prices to the exchange rate, even when the goods are disaggregated down to the HS-9 level.…”