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

Abstract

With internationally fragmented processes of production via global value chains, valueadded components of a country’s export include the importer’s contributions as well as that of exporters. 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 industries. 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 among industries help explain the dynamics of exchange rate pass-through at the industry level.

Keywords: Exchange Rate Pass-Through, Global Value Chains, Value Added in Trade