Comment on “A Pass‐Through Revival”

• DOI: http://doi.org/10.1111/aepr.12055
• Published date: 01 January 2014
• Date: 01 January 2014
• Author: Yushi Yoshida

Comment on “A Pass-Through Revival”

Yushi YOSHIDA†

Shiga University

JEL codes: F41, E31

Shioji (2014) examines whether the degree of exchange rate pass-through of Japanese

imports has substantially increased recently.Althoug h Shioji’s paper focuses on a current

issue of the 2010s, the exchange rate pass-through issue itself has a long history. Observa-

tions of incomplete exchange rate pass-through go back at least as far as to just after the

collapse of the Bretton Woods system, that is, the introduction of flexible exchange rate

system in the world. For example, the Wall Street Journal1in 1973 reported:

Exchange rate adjustments...weren’talwaysreflectedinthefinal prices of exports

and imports. Following the last upward valuation of the Japanese yen, many

Japanese exporters simply absorbed the increase, reducing their profit margins

instead of raising prices. And many American international companies took the last

dollar devaluation as an opportunity to increase the profit margins of their overseas

affiliates instead of cutting prices.

In the exchange rate pass-through literature, the seminal theoretical paper by

Dornbusch (1987) emphasizes the price setting role of exporters in imperfectly competi-

tion markets to explain the less than proportionate response of export prices to exchange

rate fluctuations. After Dornbusch (1987), a large number of theoretical and empirical

studies have focused on the price-setting behaviors of exporters.

Surely the important policy implications of exchange rate pass-through are originally

on import side, but as discussed above, the developments in this research area have been

inclined more toward exporters’ pricing behaviors. Now given the current situation in

Japan that after the decades-long period of small-inflation (or deflation), the change in

monetary policy of Japan calls for inflation of 2% within two years, our attention should

be focused more on the price transmission from import prices to final consumer prices.

In this sense, I totally agree with Shioji’s (2014) emphasis that discussions of the “pass-

through on import side” need to be revived. Now, it remains to evaluate quantitatively

how important this channel is for inflation in Japan.

Shioji’s paper investigates the price transmission mechanism by examining prices at

different stages: the import price; prices at intermediate stages; and the consumer price.

Price series are included in a standard vector autoregressive model (VAR) and a more

sophisticated VAR with time-var ying coefficients and stochastic volatilities. The impulse

†Correspondence: Yushi Yoshida, Faculty of Economics, Shiga University, Banba, Hikone, Shiga,

522-8522 Japan. Email: yushi.yoshida@biwako.shiga-u.ac.jp

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doi: 10.1111/aepr.12055 Asian Economic Policy Review (2014) 9, 141–142

© 2014 The Author

Asian Economic Policy Review © 2014 Japan Center for Economic Research 141