Question

1. The exchange rate between Japan (JP¥) and the United States (US$) currencies was especially volatile in the early 1990s. The JP¥/US$ exchange rate changed from JP¥160 per US$1 in 1990 to JP¥99 per US$1 in 1993.

a.      Did the JP¥ appreciate or depreciate relative to the US$ between 1990 and 1993? Explain briefly.

b.      How would this exchange rate change affect Japanese auto manufacturers who produce cars in Japan for export to the US? Explain your logic.

c.       How would this exchange rate change affect Japanese auto manufacturers who have factories in the US and assemble cars there from US and Japanese parts for sale in the US? Are they better off or worse off than the producers in part (b) above? Explain your logic,

d.      How would this exchange rate change affect Japanese investment companies who have previously purchased US financial assets? Explain your logic.

e.      How would this exchange rate change affect Japanese firms who have US$-denominated loans from US banks? Explain your logic.

Answer 1

1. The exchange rate between Japan (JP¥) and the United States (US$) currencies was especially volatile in the early 1990s. The JP¥/US$ exchange rate changed from JP¥160 per US$1 in 1990 to JP¥99 per US$1 in 1993.

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a.      Did the JP¥ appreciate or depreciate relative to the US$ between 1990 and 1993? Explain briefly.

The JP¥ has appreciated relative to the US$ between 1990 and 1993. This is because it takes less amount of JP¥ to buy one US$ in 1993. The value of JP¥ has increased.

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b.      How would this exchange rate change affect Japanese auto manufacturers who produce cars in Japan for export to the US? Explain your logic.

Japanese auto manufacturers will now find it difficult to export cars to the US, because their exports will become costlier. It will take more US$ to purchase the same amount of cars. The market value of Japanese cars has increased

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c.       How would this exchange rate change affect Japanese auto manufacturers who have factories in the US and assemble cars there from US and Japanese parts for sale in the US? Are they better off or worse off than the producers in part (b) above? Explain your logic,

If auto manufacturers have factories in the US and assemble there, and sell in the US, they will be better off as compared to the producers in part b. Since the JP¥ has appreciated, the US$ is now cheaper for the Japanese. They can convert their currency to US$, and purchase and assemble parts in US$. By doing so, their cost of production will fall.

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d.      How would this exchange rate change affect Japanese investment companies who have previously purchased US financial assets? Explain your logic.

Japanese companies who had purchased US financial assets earlier, had done so at a costlier US$ exchange rate. Now, the value of their investments will fall, because the US$ has become less valuable. When they try to liquidate their US$ holdings and convert to JP¥, they will get lesser amounts.

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e.      How would this exchange rate change affect Japanese firms who have US$-denominated loans from US banks? Explain your logic.

If a Japanese firm has a US$ denominated loan from a US bank, now they will have to pay out a lower amount of loan when it matures. This is because, during the loan maturity, they can convert their JP¥ to US$, and they will need to pay a smaller amount.