Global value chains and exchange rate pass-through into the import prices of Japanese industries

With internationally fragmented processes of production via global value chains, value-added 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. • Global value chains affect the exchange rate pass-through of Japanese imports. • Value-added by the importing country decreases exchange rate pass-through. • GVC can substantially explain time-varying exchange rate pass-through. • Time-varying parameter estimates confirm with dynamic ERPT driven by GVC.