The purpose of this report is to provide analysis of the Japanese auto manufacturer’s response to the rapid appreciation of the yen during the period known as Endaka and to offer recommendations to modern day multi-national corporations who are currently operating in a volatile exchange rate environment. The method of analysis includes evaluating the circumstances that led to the rise in the value of the yen as well as the subsequent actions of the Japanese auto manufacturers during this time. The results of this analysis suggest that there are several important lessons that can be derived from the Japanese auto industry’s Endaka experience. These lessons have been used to ...view middle of the document...
The economic impact of the global oil shocks of 1973 and 1979 resulted in a shift in consumer appetite towards the lighter, more fuel efficient, better designed and more cost effective cars offered by the Japanese. The success of the Japanese automakers during this period was met with pushback from the foreign markets they sold in, especially the United States. As a result, Japan’s Finance Ministers were forced to partake in and ultimately agree to the provisions of the 1985 Plaza Accord under pressure from Britain, France, West Germany and the United States. One of the primary purposes of this accord was to address Japan’s competitive advantage in the global market place which was largely supported by the nation’s lucrative export market created by the undervalued yen. By allowing the US dollar to depreciate against other foreign currencies, namely the Japanese yen, the participants of the Plaza Accord believed that a more competitive environment could be established and trade imbalances between Japan and other nations would be reduced.
The challenges Japanese automakers faced between 1985 and 1995 can be directly linked to the Plaza Accord. As a result of the provisions of this accord, the dollar dropped from an exchange rate of ¥240/$ to ¥150/$. This precipitous appreciation in the value the yen against the US dollar led many of the large, export reliant Japanese companies to suffer huge exchange losses. However, the Japanese government hoped that in the long run, a higher valued yen would create greater purchasing power of Japanese citizens and shift the focus of Japanese firms to higher value-added sectors and to domestic markets.
Despite the Japanese government’s projected long term benefits, Japanese automakers had to survive the immediate challenges created by the rapid appreciation of their domestic currency, as export sales accounted for 58% of total vehicle production. In addition to the exchange rate challenges, they also had to deal with the fact that “Endaka” did little to subdue protectionist mentality in the U.S. market. Even as the value of the yen increased, the U.S. trade deficit with Japan continued to grow. As a result, Japan voluntarily agreed to limit their exports to the U.S. This constraint on how much could be sold to the lucrative U.S. market compounded the mounting challenges of the exchange rate environment faced by the Japanese automakers.
In response to these challenges, Japanese auto makers embarked on several changes to their business model in an effort to better manage the operating exposure that resulted from the onset of Endaka. They began by cutting costs. They scaled back the overhead in their corporate offices, reduced overtime, worked on weekends when electricity was cheaper and leveraged the strong yen to lower the price they paid for their foreign components. Together, these steps did help to mitigate the damage caused by the higher exchange rates but alone proved...