To explain the perplexing issue of why Japanese trade imbalance with the U.S. has persisted despite the depreciation of the dollar, we estimate simultaneous equation models to determine the magnitude of the offsetting effects of the U.S. importer's importer's strategic pricing, the Japanese exporter's strategic pricing, and indirect cost adjustment effects of exchange rate changes on export prices . The analysis of indirect cost adjustment effect is important in the cast of Japan because that country imports mostly intermediate goods for the production of manufactured products that are exported . The analysis of importers' strategic pricing attempts to explain the effect of the importers' and retailers' pricing behavior on consumers' demand and thus, in turn, the trade balance. Our findings support the view that strategic pricing and indirect cost adjustment effects significantly reduce the effectiveness of exchange rates as a mechanism to balance international trade.
