Question

Assume Isuzu produces a car in Japan for $1.8 million. On June 1, when new models are introduced, the exchange rate is ¥150/USD. Consequently, the automaker sets the sticker price for the car at USD 12,000. By August 1, the exchange rate has dropped to ¥125/USD. Isuzu is worried that it will receive fewer Yen per sale ($12,000 ~ 125 = ¥1.5 million).

(d) Suppose the Bank of Japan intervenes in early October to push down the value of the Yen which subsequently moves to ¥225/USD. What problems and/or issues does it present for Japanese and American car companies? (2 points; 100 words)

Answer 1

d) When the Bank of Japan intervenes and pushes down the exchange rate, this will prove beneficial to Japanese car companies as they can now get more profit and also lower the prices in USD terms thereby increasing their sales and market share. For example, Isuzu can now sell their car at USD8000 and still get 1.8 million Yen.  On the other hand , American car companies would have to face tough competition from Japanese Car companies in terms of price not only in US but also in other countries (as USD is the reserve currency)  and would find it particularly difficult to sell their cars in japan.