Effect of the Yen/Dollar Exchange Rate on Nissan
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Published: Mon, 18 Dec 2017
EXCHANGE RATE HISTORY OF YEN/DOLLAR
Japans defeat in World War II, and was under the occupied authority of USA. USA set the fixed exchange rate at ¥360 per US$1 through US government plan during the post-world war year, thus the Japanese Yen became extremely weak. The Japanese Government had a lot of policies to make their economy develop such as re-building the infrastructure of many big cities which was destroyed after war, low interest rate to stimulate business especially export-based companies, and the saving habit of the citizens after the war, besides, the weak Yen against the dollar which helped give rise to the export strength of Japan. The exchange rate of Japanese Yen remained stable until 1971, when the gold standard was abandoned by the United States, which had been an important part of the Bretton Woods System, as a result, the Japanese Yen increased rapidly due to the booming of Japanese economy with many global leading industries that Japanese government wanted to success. The Yen appreciated by 35% against US dollar during 1971-1973. During the energy crisis from 1973-1975, the Yen depreciated sharply, and serious impact of this energy crisis led Japan to actively implement energy saving programs, and restructuring the economy towards increasing the proportion of service sector. In the manufacturing sector, reducing the proportion of the industry to use more energy, increasing the proportion of industries with high knowledge content (such as computer manufacturing, aircraft, industrial robotics, integrated circuits, .. .), the industry as one (high-quality clothing, electrical goods, audiovisual equipment,…) and information industry. Japan further emphasizes basic scientific research to be able to move to new economic sectors. The abroad direct investment in Japan soared to two main motivations is to utilize raw materials and energy invested in the local economy is growing and puncture protective barriers in trade the investment area is the economic development. As a result, Japan has recovered after the 1973-1975 crises and affected only slightly during the 1979-1981 crisis. The growth rate of real GDP of Japan is higher than the other industrialized countries. The Yen appreciated significantly and take the peak at ¥180 per US$1 as call first Endaka. From 1981 to 1985, the intervention of USA government led to the fall of Yen about ¥251.10 to the dollar. After the fall of Yen, the dollar began to fall and the Yen began to rise and take other peak or we call second Endaka in 1987 with Yen price about ¥120 per dollar. Since 1987, the current account surplus fell by one-third because of the huge outflow of Japanese capital, besides, the fear of inflation in Japan led to the raising interest rate of the Bank of Japan. Therefore, the demand for Yen dropped and the demand for dollar increased. 1990, the US government began to weaken their currency to avoid recession, interest rates came down. Thus, the Yen exchange rate increased and took a new point of third Endaka at ¥79 in 1995. The situation changed in mid-1995, and the dollar began to rise against the Yen. From a low of ¥84.33 in 1995, the dollar increased to over ¥147 in 1999. The Asia financial crisis was devastating to the Japanese economy, so they could not help other Asian countries to get out of its poor financial shape, and the US. Government had to rescue Japan and other Asia countries, and it led to the rising of US dollar. The end of 1999, Yen was strong against USD even though the Japanese governments tried to figure out the way to strength dollar and weaken the Yen. The Yen was fluctuated after that until 2008. The world financial crisis happened and led to the new Endaka in 2010.
Nissan motor company of Japan was in deep trouble and was influenced profoundly by Japanese yen stronger dollar. From 357 yen/dollar in 1970 up to 99.74 yen/dollar in 1994 and in 1999 Nissan lose about $264 million and debt about $13 billion. The yen/dollar exchange rate continued to fluctuate over the next few years. The Japanese economy collapsed in the mid-1990s. So that, Nissan’s $ 13 billion became seriously problem that Nissan had to face. Not only Nissan motor company, but also a lot of Japanese companies were hurtled when the yen was so strong against dollar such as Toyota’s group fell 16% for the first half of the 2000 year
THE FACTORS INFFLUENCED THE YEN/DOLLAR EXCHANGE RATE
The Japanese yen is one of the major currencies in the world with together U.S. dollar, the euro, the Swiss franc and the British pound. Between 1985 and 1992, the currency exchange rate of the Japanese yen against the U.S. dollar rose from 254 yen per dollar to about 110 yen per dollar and the government in Tokyo was forced to intervene in the market to support the dollar in order to protect the competitive prices of the Japanese export to the United States.
Exchange rate between yen/dollar is determined by variety if complex factors but one of the most important factors is policy and economy of country. For instant when Japanese economy grows strongly with the large trade surplus, the largest reserves in the world, low unemployment, low interest rate and low inflation. It will make Japanese yen stronger than US dollar. And in other case such as bubble economy will make of the country’s currency stronger. Especially from the end of 1986 to 1991 bubble economic occurred in Japan with inflow of foreign money was so high. Property prices in central Tokyo have risen by over 50% and the NIKKEI has doubled.so that, Japanese yen also stronger than dollar in this time: from 159 yen/dollar in 1986 and 134yen/dollar in 1991.
The second factor is “interest rate”. When interest rate in japan was zero while in U.S was 5.25% and In Euro was 3.75%. It creates a lot of opportunities for the “carry trade” develops and makes Japanese yen weaker than U.S dollar, for example, traders borrow Yen in Japan at very low interest rates and reinvest it in other currencies where interest rates are higher to take advantage of the spread between the rates. In order to do that, Traders have to borrow in Japanese yen, and then they have to sell the currency and get some other currency like the U.S dollar or euro. In this process the yen depreciates and the other dollar appreciates.
The thirst factor that influenced the yen/ dollar exchange rate is “Deflation” in the Japanese economy. While British consumer prices rose by roughly 3% and while they rose by 1-2% in the United States and the Euro area, they fell by roughly 1% in Japan. Deflation is a decrease in the general price level of goods and services. That nature of currency also is good. When deflation occurred in Japan, it made price of goods and services in japan form 15% to 50%. Besides that, it led to lower production, low wages and demand, high unemployment when Japanese government made decision cut labor(According to in 2010 CPI in japan reduced 2%, wage reduced 2% and bonus decreased 2,5%).Moreover, Deflation make to Increase real value of cash money and all monetary items , so that, Japanese yen was strength against dollar,
The fourth factor is “increased safe haven demand” caused by the European debt panic and the slowdown in the U.S. economy. It means the investors in the world believed the Japanese economy to continue grow and has the wonderful development steps as 1960s and 1970s. Therefore Japanese Yen has appreciated sharply despite government attempts to reduce the value of the yen.
Finally, “Effect of the Plaza Accord” influenced the yen/dollar exchange rate. In 1985 a significant change began. Finance officials from major nations signed an agreement (the Plaza Accord) affirming that the dollar was overvalued (and, therefore, the yen undervalued). This agreement and the change of supply and demand pressure in the market. Then it led value of yen to rise rapidly compare with U.S dollar. From its average of ¥239 per US$1 in 1985, the yen increased to a peak of ¥128 in 1988, virtually doubling its value relative to the dollar. After dropping in 1989 and 1990, it reached a new high of ¥123 to US$1 in December 1992. In April 1995, the yen reached a peak of fewer than 80 yen per dollar, temporarily making Japan’s economy nearly the size of the US.
THE MAJOR OPTIONS AVAILABLE TO NISSAN
There are some major options available that the case already gives at the beginning including lower prices and pick up market share, hold prices and earn more profits, keep producing autos and trucks in the United States or move its production to Mexico, Southeast Asia, or back to Japan. However, with factors that the administrators of Nissan used for strong yen environment and vice versa.
Let look at the strong yen environment, when the yen was increasing rapidly, many companies could not raise the prices as fast as the yen. We can see that Nissan choose to keep producing autos and trucks in the United States, so if Nissan produce in Japan and export to American, the cost will increase because of exchange rate of yen/dollar and the transportation cost. Besides, they run factory in America and use dollar for producing, and they can reduce their cost. This way just helps them to cut costs to offset some of the profit margin lost to the increasing yen, and it’s easy to see that when the profit change from weak dollar to strong yen, their profits worth less.
On the other hand, when yen was falling, Nissan takes advantages on it. They had the choice of keeping prices the same and earning more profits or lowering prices to pick up market share. The prices of their productions are lower than the prices of US automaker, and most of the Japanese automakers including Nissan don’t choose those options, they decide to raise the prices to earn more profits.
Nissan spends and average of ¥1.875 million to manufacture a car in Japan, plus $2,600 to market and distribute the car in the United States.
In case a, at the exchange rate at the end of each year since January 2000, the most impact of the exchange rate on dollar cost of auto is the weak yen against dollar through the Japanese government policies. They try to keep the yen weak to revive their economy and also stimulate their export companies. The weak yen means the cost on dollar increasing, so that the Japanese auto companies have more advantage then American auto companies about products prices.
In case b, Nissan wanted to sell the car at the end of 2004 the same as the end of 2001. The year-end 2004, the exchange rate is about ¥111, so the price for a car about $16891. The end of year 2001, the exchange rate is about ¥120, so the price for a car about $15625. Comparing the price we see that if they wanted to sell the same price with year 2001, they should cut costs about $1,266 per car.
The exchange rate is a key point of the Japan and other economic on over the world. Therefore, controlling the exchange rates or remaining stable the exchange rates are very important to every countries policy. Moreover, the corporation or multi-national Enterprise should consider about the exchange rate and try to find out the way to live and survive in the difficulty condition.
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