Japan has been on the receiving end of the recession with its effects dating as far back as post-World War II. On the other hand, although the yen was by then weak against the dollar, it rapidly appreciated in 2008, making it hard to operate using the currency. As a result, the export industry of Japan was affected. This situation is referred to as ‘endaka,’ and it ensures that imports remain cheaper while exports remain expensive. Japan has been hit by two strong endaka’s prior to the 2008 global financial crisis, and they have affected multinational corporations like Sony. The 2008 U.S house bubble and the Lehman Brothers bankruptcy followed by AIG’s fall affected the global economy greatly. The essay assesses the effects resulting from the contraction of both U.S and Japan economies and the effect of their respective currencies on MNC Sony.
Sony is a leading electronics manufacturer in Japan, and it relies heavily on exports. The contraction of the U.S economy resulted in the yen trading higher against the U.S dollar (Daniels, Radebaugh & Sullivan, 2011). Although this favored importers, it affected exports negatively. For example, exporting Sony products to the U.S market would lead to low sales revenue compared to the cost of production. When the yen was high, the export market became polarized because the export market could not be expanded. With a strong Yen against the dollar, the products produced had a high-cost value which would not be met at the international market. Production was affected by the contracting economies and volatile currencies. Since Sony converts all its overall financial statements into Japanese yen, the subsidiaries’ results would affect the consolidated financial statements. As a result, the financial statements of Sony were hurt. Also, the contraction affected the purchasing power of its customers hence reducing the sales revenues from the international market.
With a strong yen against the dollar, Sony faced a huge challenge from its competitors in Asia (Daniels et al., 2011). For example, it became increasingly impossible to compete with competitors from other Asian countries like the Korea-based Samsung. When the yen went high, and the Korean won low, Sony found it hard to compete as it would not meet the competitive price set at the international market. As a result, Sony has been forced to move its manufacturing plants from Japan to other Asian countries with a low currency exchange rate (Daniels et al., 2011). Offshore production would ensure that Sony reduces its operational and manufacturing costs. The currencies of these nations are better off as they would assist the organization to balance its dollar expenses and dollar revenues. The strong yen has affected the profit margin of Sony during the recession period. As a result, the earnings and net assets of Sony were low, given the rate of the dollar (Daniels et al., 2011). Subsequently, the company experienced a dry season as it was unable to sustain its production and workers fully.
On the other hand, a weak yen against the dollar would be safe to carry on business transactions. For an exporter like Sony, it would be possible to compete with other companies at the international level. The company would not worry about the production costs as the revenue generated and converted to the strong dollar would balance the consolidated financial statements from different subsidiaries. Also, with a strong yen, Sony would increase Japan’s suppliers’ orders as the Japanese economy would be enhanced. More importantly, the Japanese economy would be revived hence increasing the purchasing power of domestic consumers. The company would experience an increase in both the New York and the Japanese stock markets where it is listed and traded. Generally, operating under a weak yen also enables multinational corporations like Sony to expand their export base (Daniels et al. 2011). Lastly, from a cash flow point of view, when the yen is weak against the dollar, the dividends remittances from abroad would be valuable as the euro or dollars would be strong against the yen.
The polarity and volatility of the currency markets leading to instability is a bad signal for multinationals like Sony. Based on the case study, Sony is encouraged to invest more in offshore manufacturing in countries like the United States and Europe (Daniels et al., 2011). From an economic and financial perspective, all the financial transactions of Sony are translated from Euros and dollars to yen. This implies that if Sony has production plants in Europe and the U.S, where the market is high, Sony will gain from the international markets. Furthermore, Sony invoices its exports using the U.S dollars or Euros hence the need to match the dollar/Euro expenses with the dollar/Euro revenues (Daniels et al., 2011). By doing so, the financial statements of Sony would record a positive figure compared to when it had its manufacturing plants in Japan. Products manufactured in the U.S and Europe would be exported to Japan and other nations and still compete as the dollar would be used in the transactions. Balancing dollar expenses with dollar revenues and later converting them to yen would be more reliable than vice versa.
Japan stock exchange is ranked second in Asia after China implying that its currency is commonly used for currency exchange transactions. Therefore, getting suppliers from other Asian countries like Taiwan would be cheaper to purchase raw materials (Daniels et al., 2011). Consequently, Sony would safely invoice the purchase made in dollars, which is much cheaper. The cost of production would be low compared to having suppliers from Japan which has been struggling to stabilize its currency. The currency of other Asian nations such as the Chinese Yuen, which is also fixed against the dollar, was not affected by the recession. This implies that it would be much cheaper to outsource China’s supplies and cut its costs of production.
The global demand structure in which Japan depends on was affected much by the 2007 financial shock waves in the United States. The crisis was marred by a lot of speculation, and this saw many consumers abandoning high-end products that had by now become very expensive, in favor of the more affordable goods (Fukao & Yuan, 2010). This ended hurting Japan’s export industry hence affecting the yen.
Before the crisis, the yen in 2007 was about 106% higher, which caused a lag in the export market (Fukao & Yuan, 2009). The financial crisis started in the U.S in 2007 in the housing sector, followed by the collapse of Lehman Brothers. During this period, the U.S stock market started to collapse, which meant that other currencies like the yen were affected. As a result, of the shockwaves and the speculative nature of the markets, the yen was affected negatively, and it started to appreciate against the dollar.
Obstfeld (2009) notes that Japan’s economy has been bad since the bubble economy of the 1980s, and the yen has never been stable since then. The author adds that some financial observers note that the monetary policy is the one that needs to be blamed for late responses. This can be supported by Daniels et al. (2011), who notes that Japan has been on recession since the 1980s on several occasion. Recession causes inflation, which affects the currency stability and exchange rate. This can be reflected in the 1990s when both U.S and Japan were struggling with inflation, which threatened their currencies. For instance, in 2003, the yen was becoming stronger as the dollar weakened resulting from financial issues in both Japan and U.S. Other market forces which affected the yen before the 2008 financial crisis include disagreements among the G8 Members, high Japanese interest rates which decreased the borrowing levels hence affecting money supply in the economy.
The greatest effect on the Japanese yen since the global financial crisis in the last quarter of 2008 has been the financial recovery in the U.S. With the U.S dollar appreciating, the yen has been weakening, which is good for exporters in Japan. The Japanese yen would be more valuable in the future if proper monetary policies, regulatory policies, and measures are put into place to reduce the debts the country has as for now. With Japan’s exports increasing and the country recovering from the recession (Hays, 2011), the yen is expected to stabilize.
Reference List
Daniels, J., Radebaugh, L, & Sullivan, D. (2011). International business: environments and operations (13th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
Fukao, K., & Yuan, T., (2009). Why is Japan so heavily affected by the global economic crisis? An analysis based on the Asian international input-output tables. Web.
Hays, J. (2011). Japan, the global economic crisis in 2008 and afterwards: hard times, stimulus and slight recovery. Web.
Obstfeld, M. (2009). Time of Troubles: The Yen and Japan’s Economy, 1985-2008. University of California, Berkley. Web.