Asymmetric Exchange Rate Pass-through between Unexpected Yen Appreciation and Depreciation: The case for Japanese machinery exports

Nan Liu and Kiyotaka Sato

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: This paper empirically investigates whether Japanese exporters have changed their exchange rate pass-through (ERPT) behavior in response to large fluctuations of the yen from January 2000 to December 2022. A novel development of this study is that it incorporates exchange rate prediction errors into a nonlinear autoregressive distributed lag (NARDL) model with multiple thresholds, which enables us to rigorously distinguish not only between strong yen and weak yen periods but also between phases of unexpected yen appreciation and depreciation. We find asymmetric ERPT between the periods of strong yen and weak yen in level. More intriguingly, Japanese exporters, especially in general machinery and transport equipment industries, strategically switch their pricing behavior from ERPT to pricing-to-market (PTM) and vice versa in response to unexpected yen appreciation and depreciation. Our empirical findings have significant implications for better pricing strategies by Japanese export firms in the face of sudden, large exchange rate changes.

Pages: 30 pages
Date: 2024-01
New Economics Papers: this item is included in nep-int and nep-opm
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