In the post-world war year, the Japanese Yen became extremely weak
OVERWIEV NISSAN
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 dramatic 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 rose to a peak of ¥128 in 1988, virtually doubling its value relative to the dollar. After declining somewhat in 1989 and 1990, it reached a new high of ¥123 to US$1 in December 1992. In April 1995, the yen hit a peak of under 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.
CASE ASSUMES
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 a case, 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 through the Japanese government policies. They try to keep the yen weak to revive their economy. 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 b case, 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.
