Pricing to Market in Japanese Manufacturing
This paper investigates pricing by Japanese manufacturing firms in export and domestic markets. The paper reports equations explaining the margin between export prices in yen and domestic prices for a wide range of final goods including many of the electronic and transport products which have figured so prominently in recent trade discussions. Evidence is presented showing that Japanese firms respond to changes in real exchange rates by "pricing to market", varying their export prices in yen relative to their domestic prices. The empirical specification makes it possible to disentangle planned changes in the margin between export and domestic prices from inadvertent changes in this margin due to unanticipated changes in exchange rates. The degree of pricing to market varies widely across products, but there is strong evidence that pricing to market occurs. The paper also investigates whether pricing to market has increased in scale in the period since 1985 when the yen began a sustained appreciation, but finds that only five of seventeen products experienced a shift in price behavior over that period.