Celestila Moonn opens The Wall Street Journal and finds that in Japan the capita

Question

Celestila Moonn opens The Wall Street Journal and finds that in Japan the capital markets surged recently, benefiting from Prime MinisterShinzo Abe and the Bank of Japan’s aggressive policies designed to stimulate economic growth and lift the country out of deflation. Moon was wondering in response to these polices, whether Japanese yen will appreciate or depreciate relative to U.S. dollar. In order to clear her concepts on foreign exchange markets,Moonn opens the text and after completing the chapter 31 readings,Moonn ponders whether the exchange rate changes between the U.S. dollar and the Japanese yen necessarily good or bad for Japanese automakers. Briefly discuss whether strong or weak yen would benefit Japanese automakers.

Explanation / Answer

A stronger yen may end up hurting earnings growth of automakers in Japan. From last 4 years Toyota, Honda and Nissan have earned huge profits from overseas selling, especially in US, but now due to a surge in Yen it will cost them more to manufacture cars in Japan then selling them to countries having weaker currencies.

Japanese automakers won't be able to achieve their targets, ad per recent forecast profits will drop by around 10%,looking at the current yen spot rate.

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