Question

Consider the situation of the Japanese and US carmakers. The spot rate is yen 105/$. The yen suddenly weakens to 125/$. Discuss the issues involved in deciding how each automaker responds.

Answer 1

Exchange rate between Japan and US changes from 105 per dollar to 125 per dollar.

Japan exports approximately 10% of the total cars sold in US every year. As US dollar have appreciated, it will be raise the price of Japanese cars exported to US. If they raise price of their car, consumer will start preferring car made in US and stop importing. If they do not raise the price, they will have to suffer the loss. This appreciation of US dollar will surely reduce the market share of Japanese cars in US.