Exchange rate exposure: The fall of Yen currency

The yen has dropped to its lowest point against the US dollar in seven months (BBC news). The dollar rose to 80.24 Japanese yen late Wednesday from 79.71 yen in 21^st Feb 2012. According to BBC news, one of the reasons for the fall is    Part of the reason for the fall is the Bank of Japan's surprise increase of its stimulus measures. Another reason is the strengthen of USD.  

The fluctuation of Yen/USD exchange rate affects upon Japan’s multinational companies and multinational companies operating within the country. The bulk of Japanese exports and imports are denominated in U.S. dollars rather than Japan's local currency, the yen. Japanese exporters are likely to receive dollar revenues but incur most of their costs in yen. Likewise, Japanese importers make dollar payments though sales are likely to be denominated in yen.  

The fall of Yen against US Dollar have energized Japanese manufactures and the economy since Japan is heavily dependent on exports. The weak Yen make exporters cheaper overseas and therefore more competitive. For instance, car manufacturers such as Toyota, Honda and Mitsubishi, have been some of the benefits by the weak yen as it makes their products more competitive abroad. If the Yen’s strengths, it will be a worst hit for Japanese exporters. “Toyota, for example, bases its earnings on an exchange rate of ¥105: every ¥1 appreciation against the dollar costs the firm ¥35 billion ($350m) in annual operating profit. Almost 60% of the companies on the exchange's main market are trading at less than their book value.” (The Economist, 2008). An amount of cash, which Japanese exporters have received, will increase as the result of Yen’s fall. The fall also supports the demand of Japanese products and services so the market shares of Japan firms will increase. Generally, weak Yen have benefited Japanese exporters. However, some industries like automobile industry have to import raw materials, components from outsiders, the fall would incline the costs of those imports, and effect cost advantages. Even companies do not directly import raw materials from international markets, the fall indirectly take away cost advantages through their suppliers who use imports.              

In contrast, the fall brings the advantages for Japanese export companies while make disadvantages for Japanese import companies as well as foreign export firms. This is the drawback because overseas products’ price has been higher than domestics’ price. Profit, which importers and outsiders gain, will be less. Moreover, the weak Yen influences customer demand. The cheaper price of products and service of domestics will make customer switch from overseas products to domestics’ one. Market share of those companies will decrease as well. Foreign companies will lose their Japan market share.

The decline of Yen also effect multinational companies which operating in Japan especially US firms. The Japanese investment requires Yen currency. One, Yen drops against Dollar, the cost of international investment will decrease. However, returns and profits from Japanese subsidiaries have been decreased when foreign companies convert from Yen into USD.