Commodity Price Pass-Through and Inflation in Japan: A Nonlinear Time Series Analysis

Abstract

Declining pass-through of commodity prices in Japan has been reported in the related literature. In this study, I investigate why the pass-through has declined in Japan over time. By estimating the threshold autoregressive model that considers past inflation rates, I find that the short- and long-run pass-throughs are lower in low-inflation regimes. This suggests that the state of inflation plays an important role in understanding declining pass-through in Japan. Second, energy prices have a significant effect on inflation in both the short and long run. However, I could not identify the effects of non-energy prices on inflation. This result suggests that the Bank of Japan needs to pay significant attention to energy prices to control inflation, particularly when it faces high inflation.

Keywords: commodity price, pass-through, inflation, threshold autoregressive model

JEL Classification: C22, E31, Q43