Asymmetric Exchange Rate Pass-Through in Japanese Exports: Application of the threshold vector autoregressive model

         
Author Name Thi-Ngoc Anh NGUYEN  (Yokohama National University) /SATO Kiyotaka  (Yokohama National University)
Creation Date/NO. August 2015 15-E-098
Research Project Research on Exchange Rate Pass-Through
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Abstract

This paper employs a threshold vector autoregressive (TVAR) model to analyze a possible asymmetric behavior of exchange rate pass-through (ERPT) or pricing-to-market (PTM) in Japanese exports between the yen appreciation and depreciation regimes. We developed a new approach to estimating the exporting firm's reference (predicted) exchange rate by applying the threshold autoregressive (TAR) model with a rolling window. We also use an industry-specific nominal effective exchange rate on a contract currency basis to better capture a role of the U.S. dollar as the third currency for trade invoicing. It is found that the degree of PTM (ERPT) was larger (smaller) in the yen depreciation regime up to the end of the 1990s but became smaller (larger) in the 2000s and after. A decline (increase) in PTM (ERPT) in the yen depreciation regime suggests that Japanese exporters tend to lower the yen-based export price and fail to fully exploit foreign exchange gain in response to the yen depreciation, likely due to an increase in export competition in the world market.