Is Japanese Retail Industrial Fuel Oil Price Stickier Downwards Than Upwards in Response to Oil Cost Shocks?

Abstract

This paper examined the Japanese industrial fuel oil market for evidence of asymmetric price adjustment and rent-seeking following changes in crude oil prices. The study used the nonlinear autoregressive distributed lag (NARDL) modeling framework and monthly time series data for the period January 2005 to December 2015. The results indicate that Japanese industrial fuel oil market is fraught with sluggish speed of adjustment, which is typical of markets witnessing uncompetitive pricing and other irregular behaviours by retail firms. The results further indicate that Japanese industrial fuel oil market is bedeviled by the problem of short-run asymmetric price transmission from crude oil market, which is consistent with the rockets and fathers effect. However, the results did not show any evidence of rent-seeking since the observed short-run asymmetry is not obscured at pump. In view of the prevailing problem of rockets and feathers effect, the paper supports policies that will encourage continuous monitoring of the market in order to preserve competition and the overall social welfare.

Keywords: Rockets and Feathers effect; Rent-seeking; Asymmetric Price Adjustment; Nonlinear ARDL model; Japan

JEL Codes: Q43; D40; C22; N94.

DOI: 10.7176/JESD/10-4-15