Japan's Automakers Face Endaka -

Japan's Automakers Face Endaka - Case Studies Analysis 1985 and 1994-1995 marked two of the three endakas (the previous one had happened in 1970), periods of strong appreciation of the Japanese Yen against the dollar, with a strong impact on the Japanese economy. The endakas affected not only the four main car manufacturers in Japan, but almost all the industries that relied heavily on the foreign markets and on exports in order to survive.

The causes for these changes are quite simple to explain, especially if we follow the patterns of the main currency exchange rates. Indeed, this show periods of strong appreciation, followed by depreciations. If we point out towards our own example, the Japanese Yen traded somewhere around 240 yens per dollar before the Plaza Agreement, only to appreciate to around 180 yens the following year, a 30% increase.

The reason for this is that the healthy macroeconomic policies promoted by President Reagan during the first half of the 1980s had led to increases in the interest rate and a strong dollar. The strong dollar meant, on the international markets, first of all cheap imports, from Japan or Europe, imports that led to a rise in unemployment rates in such industries as steel or textiles. Further more, cheap imports meant a swirling current account deficit, because, while the imports remained cheap, the ratio between the U.S.

cost of production and the revenues from foreign exports were quite high. This simply meant that the U.S. products were not cost-competitive on the international markets, as we have seen from the case study (the example of the car manufacturers that were able to produce using fewer workers and cheaper is eloquent in this sense). The American reasons for a weaker dollar were in this sense obvious.

On the other hand, the European and Japanese trade partners had an interest to see a weaker dollar because these countries expected a weaker dollar to a healthier trade balance and to a reduction in the protectionist measures the U.S. was using in steel or textiles. The Plaza Agreement was the natural result of these converging industries. In September 1985, the finance ministers from Britain, France, West Germany, Japan and the United States agreed to intervene in order to reduce the value of the dollar.

This was done by selling large amounts of dollars (only the Bank of Japan sold $3 billion) and buying yens. The effect of such a measure is natural from the perspective of economic theory: an increase in the demand for a certain product will increase its price. Further more, a subsequent increase in supply will lower the respective product's price. In this sense, a higher demand for the Japanese Yen, corroborated with the increasing supply of U.S.

Dollars led to an increase in the price of the Japanese Yen respective to the dollar. The second enkada followed, more or less, the same course of action. 2. The Japanese firms gave realistic and notable solutions to the currency exchange rate problem that has been previously described.

The Japanese economy had relied quite a great deal on exports since the Second World War, so it only seemed natural that the currency policies that would encourage imports rather than exports, such as the currency appreciation, would lead to alternative ways of action for the Japanese firms and, most notably, the Big Four Automakers. Even if a strong yen encouraged imports and thus raw material used as input, the Japanese companies needed to change their policies in order to adapt to the less encouraging exporting environment.

Relocation was the answer in this case. Relocation implied that the production facilities would be moved from Japan, where the production costs increased due to a higher yen, to the Untied States, beneficiating thus from the weaker dollar. Additionally, relocating the production facilities helped avoid any protectionist practices that the U.S. government might have applied in the case of Japanese car producers and exporters. On the other hand, relocation was doubled by strong austerity measures back home.

This included improving the companies' productivity and efficiency and cutting the cost of production, but also market diversification. The latter implied the fact that the Japanese carmakers attacked market sectors that had been out of reach before: higher margin segments and the luxury car segment. Prices gradually rose to counterbalance the appreciating yen.

The 1994-1995 enkada proved an even harder to deal with problem, as the rates reached 80 yen for a dollar and, additionally, the competitive environment was much tougher than in the 1980s, with new companies in the market, like those from South Korea (Daewoo), with highly competitive price advantage. In this case, there are several solutions that can be adopted. In my opinion, relocation to the U.S. is not enough any more.

As we have seen from the case study as well, even companies with large cash reserves and the capacity to commit to cost reductions would not have been able to sustain the second endaka on these measures alone. Relocation to Asia was the most important answer that the Japanese car manufacturers gave to the new currency challenges. This workforce market offered qualified people at much lower salaries than otherwise practiced in Japan. Needles to say that administrative and maintenance costs were also much lower.

On the other hand, such a solution came in strong dissonance with Japan's perception on loyalty and lifetime employment, while the pressure from the internal market was extremely high. The price increase, somewhat successfully applied during the first endaka, was also an applicable solution, but only to certain market segments, more notably those where the demand was inelastic as to price. 3.

Companies that rely quite significantly on exports as part of their profit have to take into account any appreciation of their national currency, because in this case, their exports will become cheaper and their profit margins lower due.