Pass-Through of Oil Prices to Japanese Domestic Prices
In this paper, we investigate changes in the impacts of world crude oil prices on domestic prices in Japan. First, we employ a time-varying parameter VAR (TVP-VAR) approach to confirm that the rate of pass-through of oil prices declined, both at the aggregate and sectoral levels, for the period 1980-2000. Second, by utilizing Input-Output Tables, we find that changing cost structure of Japanese firms goes a long way toward explaining this decline. That is, by the year 2000, oil had become a much smaller component of the Japanese production cost structure. We further find that much of this is attributable to changes in relative prices: as oil became cheaper, it became less important in the overall cost structure, and thus pricing behaviors of firms became less responsive to its prices. Substitution effects, namely firms' shifts toward less oil intensive production, on the other hand, appear to be less important. We also study the period 2000-2007. We find that, although pass-through rates of oil prices increase in many instances, those increases are small in comparison to the drastic resurgence of oil in the cost structure of firms. We present some possible explanations for this finding.
A part of this paper is based on research we have conducted at the Research and Statistics Department of the Bank of Japan. We would like to thank members of the Department, especially Kazuo Monma, Munehisa Kasuya and Masahiro Higo for helpful comments and discussions on our research. We also thank Takatoshi Ito for insightful suggestions at an early stage of this research. We are grateful to participants of the 20th East Asian Economic Seminar (Hong Kong, June 26-27, 2009), especially the discussants Donghyun Park and Yuko Hashimoto, as well as the organizers (Andrew Rose and Takatoshi Ito) for many invaluable comments that have led to substantial improvement of the paper. We also would like to thank two anonymous referees for their insightful comments. Shioji thanks financial assistance from the "Understanding Inflation Dynamics of the Japanese Economy" project of Hitotsubashi University, and Uchino thanks the Global COE Grant "Research unit for statistical and empirical analysis in social sciences" of Hitotsubashi University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Pass-Through of Oil Prices to Japanese Domestic Prices, Etsuro Shioji, Taisuke Uchino. in Commodity Prices and Markets, Ito and Rose. 2011