SECTORAL PRICE MOVEMENTS UNDER THE YEN APPRECIATION

This paper analyzes the movements of tradable goods prices in Japan. T he import price indices and the export price indices are matched with the domestic wholesale price indices at the most detailed level availa ble for Japan, and the pricing behavior in the yen appreciation period (1985-1995) is examined. In the import-side analysis, we investigate how far the price movements under currency appreciation deviate from t he law of one price. We find that internal-external price differential s have surprisingly expanded for most of the products since 1985. For a number of commodities, the import prices do not decline as far as th e exchange rate appreciates, and the domestic wholesale prices do not decrease as far as the import prices decline. Although the expanded pr ice gaps cannot necessarily be interpreted as a result of deliberate t rade barriers, they suggest that some sort of handicap is imposed on i mported goods and the large fraction of rent generated by the yen appr eciation is intercepted in the middle. In the export-side analysis, th e relationship between the globalization of firms' activities and expo rt pass-through is investigated. Our cross-sectional regression analys is indicates that the export path-through rates tend to be low when th e value added ratios of foreign production of Japanese firms are high. Low export pass-through under currency appreciation is often interpre ted as a result of firms' attempts to keep their foreign market share, but the globalization of firms' activities may be another important f actor in lowering the pass-through. (C) 1997 Academic Press.