The Effects of Technology Changes on the Sectoral Trade Patterns and the Import Penetration Ratio

The inflation rate in Japan has been decreasing since the beginning of the 1990s. Although weak domestic demand most probably explains a large part of the story of this deflationary trend, external factors such as the recent increase in the number of cheap imported goods, have played an important role. In fact, the import penetration ratio in Japan has been increasing since the beginning of the 1990s. This paper empirically analyses the dynamics of sectoral trade patterns and the aggregate import penetration ratio by considering both macroeconomic factors (expected changes in common technologies and unexpected changes in sector specific technologies) and sector-specific factors (changes in the levels of comparative advantage). The empirical analysis successfully explains the rise in the Japanese import penetration ratio during the 1990s.