Question

Why is a weaker yen good for the profits of Japanese auto companies?

Answer 1

Solution

Trade is a mutual agreement between 2 or more countries to exchange goods.Reason a country carries out trade is due to imbalance between supply and demand for a good(s)/service(s) and /or due to it's competitive advantage in rendering a goo(s) or a service(s).

Foreign exchange rate plays an important role during trade between different countries.

Weaker Yen is good for the profits of Japanese auto companies because their products(automobiles) become gain competitive advantage in terms of price leading to higher demand ultimately leading to higher profits to their companies.

Weaker Yen =>Lower Price =>More competitive in terms of price =>Higher demand=>Higher exports =>Higher Sales => Higher Revenue =>Higher profits (because the ficed component of production remains the same but the variable cost remains the same)

As a general rule,in case of any country,if it's currency depreciates/weakens in relative to any currency,it's good for it's exports as the price of exports will comparitively decrease in the global market .But it is harmful in the case of imports,reason being the price of imported goods become costlier as their currency value decreases;so the consumers have to shell out comparitively more money to buy the goods.

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