Term Paper on "Japan's Automakers Face Endaka Case Studies Analysis"

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Japan's Automakers Face Endaka - Case Studies Analysis

1985 and 1994-1995 marked two of the three endakas (the previous one had happened in 1970), periods of strong appreciation of the Japanese Yen against the dollar, with a strong impact on the Japanese economy. The endakas affected not only the four main car manufacturers in Japan, but almost all the industries that relied heavily on the foreign markets and on exports in order to survive.

The causes for these changes are quite simple to explain, especially if we follow the patterns of the main currency exchange rates. Indeed, this show periods of strong appreciation, followed by depreciations. If we point out towards our own example, the Japanese Yen traded somewhere around 240 yens per dollar before the Plaza Agreement, only to appreciate to around 180 yens the following year, a 30% increase.

The reason for this is that the healthy macroeconomic policies promoted by President Reagan during the first half of the 1980s had led to increases in the interest rate and a strong dollar. The strong dollar meant, on the international markets, first of all cheap imports, from Japan or Europe, imports that led to a rise in unemployment rates in such industries as steel or textiles. Further more, cheap imports meant a swirling current account deficit, because, while the imports remained cheap, the ratio between the U.S. cost of production and the revenues from foreign exports were quite high. This simply meant that the U.S. products were not cost-competitive on the international markets, as we have seen from the case study (the example of the car manufacturers that were able to produce using fewer workers and cheaper is eloquent in this sense).

The American reasons for a weaker dollar were in this sense obvious. On the other hand, the European and Japanese trade partners had an interest to see a weaker dollar because these countries expected a weaker dollar to a healthier trade balance and to a reduction in the protectionist measures the U.S. was using in steel or textiles. The Plaza Agreement was the natural result of these converging industries.

In September 1985, the finance ministers from Britain, France, West Germany, Japan and the United States agreed to intervene in order to reduce the value of the dollar. This was done by selling large amounts of dollars (only the Bank of Japan sold $3 billion) and buying yens. The effect of such a measure is natural from the perspective of economic theory: an increase in the demand for a certain product will increase its price. Further more, a subsequent increase in supply will lower the respective product's price. In this sense, a higher demand for the Japanese Yen, corroborated with the increasing supply of U.S. Dollars led to an increase in the price of the Japanese Yen respective to the dollar. The second enkada followed, more or less, the same course of action.

2. The Japanese firms gave realistic and notable solutions to the currency exchange rate problem that has been previously described. The Japanese economy had relied quite a great deal on exports since the Second World War, so it only seemed natural that the currency policies that would encourage imports rather than exports, such as the currency appreciation, would lead to alternative ways of action for the Japanese firms and, most notably, the Big Four Automakers. Even if a strong yen encouraged imports and thus raw material used as input, the Japanese companies needed to change their policies in order to adapt to the less encouraging exporting environment. Relocation was the answer in this case.

Relocation implied that the production facilities would be moved from Japan, where… READ MORE

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