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.”

1. What does the article mean by a “plunging yen”?

2. Why would a plunging yen be a boon for Fuji Heavy Industries?

3. Briefly explain whether a plunging yen would help or hurt Honda.

Answer 1

a)

Plunging in business means going down quickly and Yen is Japanese currency.

Hence "Plunging Yen" indicates Yen getting weaker against the dollar.

For instance in 2015 (time of this case), 1 dollar has started buying 115 Yen as against 80 Yen in general.

b)

When Yen plunged, exporting cars from Japan became a highly profitable proposition for Fuji Heavy Industries.

As stated in previous answer 1 Dollar has started buying 115 Yen in 2015, and this came out to be a plus for the company as it was paying its workers and suppliers in less-valuable yen, while generating revenue in dollars from US and other overseas customers.

The weaker yen also gave Fuji enhanced pricing power as the company could offer buyers more cars for the same amount of money. It also had provision for enhancing its product quality/offering.

It was a situation wherein sales slowdown in Japan & China was expected to help the company as it could ship more cars overseas and earn much more than it would by selling the same car domestically.

Hence, in totality plunging Yen has been a great boon for Fuji.

c)

Honda cannot get the same level of benefits from Plunging Yen as it has only 21% of production in Japan as against almost 80% of domestic production by Fuji.

Honda has its production facility based in the USA , hence any Plunge or Jump in value of Yen will not affect it directly. In the USA Honda will be paying all its workers suppliers in dollar only hence the benefit which Fuji made (with plunged yen) is not there with Honda.

On the contrary it's going to hurt Honda in terms of Market Share. Because with benefits elaborated in the answer above Fuji will surely have more offerings or a cheaper car for the USA market and will attract more demands. The Honda market share will accordingly shift to Fuji.

Hence although a direct effect doesn't look obvious but plunging yen will actually hurt Honda.