Exchange Rate Pass-Through to Manufactured Import Prices: The Case of Japan

This paper examines the exchange rate pass-through to yen based manufactured import prices of Japan using asymmetric unit root and cointegration tests and asymmetric models. Due to sticky prices, for example, there are reasons to believe that the degree of pass-through depends on whether the exchange rate appreciates or depreciates. The sample used in this study covers the period January 1975 to June 1997. Using two state regime switching models, the estimated pass-through coefficients corresponding to appreciation and depreciation of the currency are found to be 98 percent and 83 percent respectively; these coefficients are shown to be significantly different, particularly in the post recession period. Moreover, we have shown that the recession in Japan in the 1990s has significantly affected the exchange rate passthrough relationship particularly when the yen depreciates and that the proposition that exchange rate depreciation and appreciation have systematic asymmetric effects on exchange rate pass-through coefficient. Forcing appreciations and depreciations to have the same effects on the import prices does not appear to uncover the true underlying exchange rate pass through relationship.