Impact of Japanese Yen’s Exchange Rate on the Economy of Japan – Kavan Choksi Japan

There have been huge fluctuations in the value and exchange rates of the Japanese currency Yen over the last couple of decades. In the first half of the 1980s, Yen was typically traded at a rate of about 200 to 270 Yen per dollar. However, but the second half of the eighties, the majority of the western economies were concentrated in New York and started devaluing the dollar with an agreement called Plaza Accord. This set off a strong effect on the Yen over the next few years, and the forex rates of Yen had gone up to 80 Yen per dollar.

Japanese Yen had seesawed over the last three decades, especially in the eighties, as we discussed above, due to the impact of the Plaza Accord. Kavan Choksi Japan points out thatthe Plaza Accord had also led to a certain period of volatility in exchange rates, which again contributed to the manufacturing industry of Japan, which started shifting from the domestic production to exports and large-scale production overseas.

This shift had also hit the employment opportunities and consumption in Japan and impacted the companies outside manufacturing and those who are fully domestic-based. Different companies also enjoyed better stability in Japan and also became less vulnerable to exchange rate vulnerabilities. The overall economy’s strength remained to be in an upward trend.

Also, starting from the mid-nineties, the Japanese yen had started witnessing many violent swings. While none of those was extensive as the previous ten years after the Plaza Accord, all of these wreaked havoc on the business mindset of people and the politicians who changed the structure of the Japanese economy. The Yen started to gain another strengthening round during the first decades of the 2000s and also smashed through ninety yen per dollar in 2011. However, this trend started reversing with the new government under Mr. Abe and the newly appointed central bank governor Mr. Kuroda. These two promised and implemented big quantitative easing.

The impact of exchange rates on Japan’s economy

In order to understand the overall impact of Yen exchange rates on the country’s overall economy, we can explore a simple example. We may assume that the exchange rate is about 120 Yen per dollar. In this situation, assume a company ‘A’ which builds Japanese cars and exports those to the US. Assume another company named ‘B’ has a factory in the US so that their cars are manufactured and sold there. Considering these, we may further assume that the cost of company A spends about 1.2 million yen for making a car in Japan ($10,000) based on the 120 yen per dollar assumption. So, the cost to company B is $10,000 for making the same model in the United States. So, the costs per vehicle may be the same. As both cars are the same models and quality, we may assume that both the cards are being sold at $15,000 in the United States. If so, both the companies make a profit of $5,000 per vehicle, which becomes 600,000 Yen when repatriated back to Japan.

We may find many such examples to analyze the global business situation in Japan. So, as Kavan Choksi Japan suggests, Japan remains a safe haven for manufacturers and technology businesses.