The Decline in the Exchange Rate Pass-Through: Evidence from Japanese Import Prices

In this paper, we empirically examine the movement of the exchange rate pass-through to the aggregate import prices in Japan from the 1980s through 2001. We demonstrate that the exchange rate pass- through to Japan's import prices fell in the 1990s, and such a decline occurred mainly during the period from the late 1980s to the mid-1990s. In addition, we show that the decline came mainly from declines in the exchange rate pass-through in each product, rather than a shift of import share from raw materials to manufactured goods with a lower exchange rate pass-through. Moreover, the period of the decline in the exchange rate pass-through coincides with the period of the sharp appreciation of the yen and resultant structural changes in the economy and international trade. Although the advance in the globalization of Japanese firms is likely to reduce the exchange rate pass-through to import prices, it should be noted that the decline in the exchange rate pass-through does not necessarily imply that exchange rate fluctuations have become less important in connection with macroeconomic fluctuations.