Question

Suppose that the Japanese yen depreciates relative to the U.S. dollar. How does this affect the competitiveness of both Ford and Honda in both the U.S. and Japanese markets? Create a numeric example to show how Honda could reduce the dollar price of cars sold in the U.S. and still earn more yen per car compared with the stronger yen and higher dollar price

Answer 1

The exchange between countries depicts the monetary value connection between their goods and services. Many countries, say China for example, have been lamented to manipulate their currency valuation to keep their goods and services competitive.

For example if Yen depreciates as compared to Dollar, it would adversely impact Honda if they are manufacturing in Japan and importing some services or parts of vehicle from US market. But if they manufacture in Japan and export to the US, it will increase their profit as purchasing power of dollar has increased and they will get more yen if they sell it for same dollar as they were doing previously. For FORD in Japan, their purchasing power is more they can give more discounts in Japan, and become more lucrative. But back in the US if they are competing against Honda cars made in Japan, they can face stiff competition as they are manufacturing in dollars and selling in dollars, while Honda is manufacturing in YEN and selling in Dollars.

For example suppose 1 dollar = 100 Yen which previously was 50 YEN. Previously Honda manufactured a car in 50 YEN and sold their customer in the US in 2 dollars, making a profit of 50 YEN (100-50). Now they are manufacturing a car in 50 YEN, as it is being manufactured in Japan. But even when they sell it for Dollar 1.5, which means 150 YEN from current valuation, they will make profit of 100 YEN (150-50).

Remember, above point is only valid if they are not importing any parts from the US, cause it will cost more to import anything from their now.