Global Value Chains and Exchange Rate Pass-through into the Import Prices of Japanese Industries

With internationally fragmented processes of productions, i.e., global value chains, value-added components of a country’s export include the importer’s contributions as well as the contributions of third countries. The exchange rate sensitivity of export price reflects these value-added components. We examine the effect of value-added contributions of exporters and importers on the degree of exchange rate pass-through by focusing on the Japanese import prices by industry. Our results show that exchange rate pass-through increases for industries with a higher contribution of exporting countries’ value-added and for industries with a lower contribution of the importing country’s value-added. The differentials in value-added help explain the dynamics of exchange rate pass-through at the industry level.