Monetary and Economic Studies Vol.24, No.1 / March 2006

Revisiting the Decline in the Exchange Rate Pass-Through: Further Evidence from Japan's Import Prices

Akira Otani, Shigenori Shiratsuka, Toyoichiro Shirota

Many empirical studies show common empirical findings that the exchange rate pass-through to import prices in advanced countries declined in the 1990s. Some of those studies, however, draw contrasting conclusions regarding the factors behind the decline. Campa and Goldberg (2002) point out that it comes mainly from the decrease in the import share of primary commodities, such as raw materials and fuels, while Otani, Shiratsuka, and Shirota (2003) make the case that it is mostly attributable to the decline in the exchange rate pass-through in each product category. In this paper, we empirically reexamine the validity of the contrasting hypotheses. Our empirical results demonstrate that the decline in the exchange rate pass-through to Japan's import prices excluding primary commodities is largely attributable to the decreases in the exchange rate pass-through in each product. Our empirical results also suggest the possibility that the declines in the long-term exchange rate pass-through to overall import prices are induced partly by the reduction in the import share of primary commodities. The second point, however, should be taken cautiously, because the precision of the estimates is not high enough to draw a definite conclusion.

Keywords: Exchange rate pass-through; Pricing-to-market; Import structure; Expenditure-switching effect; Firms' sourcing decision

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2006 Bank of Japan All Rights Reserved.

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