Question

Today, most Japanese automobile companies have manufacturing plants in the United States. Honda, for example, exports from Japan only 21 percent of the cars it sells in the United States. Fuji Heavy Industries whose main car brand is Suburu, is an exception in still producing most of its cars in Japan. An article in the Wall Street Journal observed that for Fuji Heavy Industries, “the plunging ye has turned a problem – a shortage of production in the US – into an unexpected boon.”

=> What does the article mean by a “plunging yen”?

=> Why would a plunging yen be a boon for Fuji Heavy Industries?

=> Briefly explain whether a plunging yen would

Answer 1

A. The plunging yen means that the value of Yen in the international market has fallen when compared to the dollar. As a result US markets will find imports from Japan to be cheaper than normal because they cany purchase more for the same value of a dollar than earlier

Eg - Price of product- 1100 yen

Intitially 1 dollar = 100 yen, which means the product will be sold for 11$, i.e. 1100 /10

Now if value of Yen falls, then lets assume 1 dollar = 110 yen, which means the product will be sold for 10$, i.e. 1100/110

So US market will find Japanese products to be chaper.

B. As mentioned US markets will find Japanese products to be cheaper due to a plunging yen, This means that Japanese exports to the US will increase. Since Fuji Heavy industries produce their goods domestically, they will find a higher export demand. Therefore Subaru cars will be much cheaper in the US market than earlier and consumers will show higher demand sfor such products which increases the profits of Fuji based industries.

C. A plunging yen would not be much beneficial for Honda because Honda only imports 21% of its cars from Japan. The majority of Honda cars are produced in the US. As a result the cost of production remains the same for US produced cars and Honda cannot achieve the same level of benefit as Fuji Heavy Industries can reap. However, the 21% of cars that Honda imports form Japan will be cheaper and they can make a profit out of this fraction. There fore a marginal benefift is achieved but competition form Fuji industries means that this profit will be further brought down.