So in my last post I mentioned briefly the rising Yen, and the fact that the Japanese government is not very happy about it. This seems counter-intuitive in the sense that you would think a strong currency equates to a strong economy, but this isn’t true. Here’s a perfect example of why their strong currency hurts them so bad, and why they have to do something about it, as soon as possible.

Let’s take the example of Toyota. Toyota has been a stronghold for the Japanese economy for years. Ever since their inception in 1933, they have been one of the most visible and productive of all Japanese firms. Only until now have they decided that financially, producing in Japan maybe isn’t their best option. In their recent earnings report, CFO, Satoshi Ozawa, threatened that Toyota would have to look to produce their cars elsewhere if the Yen continues appreciating. This makes sense. Let’s say, just for example, that Toyota used to be able to sell 1 million cars, at an average price of $15,000 and a $/Y exchange rate of 90 (i.e. 1$ can get you 90 Yen). Now, at an exchange rate of $/Y of 80 (i.e. you can now get less Yen for your dollar), that means that they are making less money, even if they are producing the same amount. If the Yen continues to increase, that only continues to cut into their profit margin, leading to a bad business strategy to not look for cheaper markets for production.

So if the Yen continues to appreciate, Toyota leaves. Presumably others follow. If you’re the Japanese government, how do you not try to devalue your currency? If you’re Germany, for example, and you see Japan devaluing their currency, how do you not try to push for the same for the Euro? As you can see, once one country adamantly starts this cycle, it will only lead to a domino effect to other countries. But then again, if you’re Japan, what else do you do?

Here’s an article talking about it on FT: http://www.ft.com/cms/s/0/23b466de-e8af-11df-a383-00144feab49a.html#axzz14QHX9OIO