Question

You are a Japanese company that manufactures laptops in Japan. Your business model is mainly export based; you export to China. You also import the chips for your laptops from India. Think about and answer the following questions:

.A. If there was a 20% appreciation in the Yen (Japanese currency) as compared to the Chinese Yuan, how would this impact your laptop business?

B. If there was a 50% depreciation in the Indian Rupee as compared to the Yen, how would this impact your laptop business? (Hint: Remember you import chips from India).

minimum 200 words

Answer 1

A. The company manufactures laptops in Japan and exports them to China. Therefore, one of the biggest risks to its business model is the appreciation in Yen's exchange rates against Chinese yuan. The reasons are explained as below:

• When value of a country's currency gets appreciated against other currencies in international market, it becomes more expensive for residents of other countries to import goods from the said country.
• For e.g.- Let's say the exchange rate between Chines Yuan and Japanese Yen is 1:15 (i.e. 1 Yuan=15Yen). If the Japanese company in our question sells its laptops for 45,000 yen to importing companies from China, it costs the Chinese companies 3,000 Yuan (45,000/15) to import one laptop. Now if the value of yen against yuan increases to 12.5 yen per yuan, the same Chinese companies would have to spend 3,600 yuan (45,000/12.5) to purchase one laptop from the Japanese company.
• Therefore, a 20% appreciation in yen against Yuan can have a major impact on Japanese company's sales as its products have become 20% more expensive for Chinese importers and the pricing has become less competitive to other international manufacturers of laptops
• The Chinese importers may shift their demand towards other international laptop manufacturers who were earlier more expensive than the Japanese company but have now become a better option after appreciation of yen against yuan

B. It's also given in the question that the company imports chips used in the manufacturing of laptops (i.e. one of its raw materials) from India. The 50% depreciation of Indian rupee against yen is good for the Japanese company due to the following reasons

• When value of a country's currency gets depreciated against other currencies in international market, it becomes cheaper for residents of other countries to import goods from the said country.
• For e.g.- Let's say the exchange rate between Indian rupee (INR) and Japanese Yen is 1:1.5 (i.e. 1 INR=1.5Yen). If the Japanese company in our question imported one chip from India for INR 1,500, it had to pay 2,250 yen (1,500*1.5) to import one chip.Now if the value of INR against yen falls by 50% to 0.75 yen per INR, the Japanese company would have to spend 1,125 yen (1,500*0.75) to purchase one chip from India
• Therefore, it would reduce the import bill of Japanese company by 50% and strengthen their business