Question

A 2017 Dow Jones Newswire article about Toyota noted, "The company has long been committed to building at least three million vehicles a year in Japan, in part out of a desire to provide jobs in the country.... That was an easier decision when a dollar bought 120 yen two years ago." a. Does the article imply that in 2017 it took more than 120 yen to exchange for a dollar or fewer than 120 yen? Briefly explain. b. Given your answer to part (a), why would Toyota's decision to produce 3 million cars in Japan have been easier two years before this article was written?

Short answer

a) The 2017 article implies that it took more than 120 yen to exchange for a dollar. b) It would have been easier for Toyota to take the decision on producing 3 million cars in Japan when the yen was stronger (went further against the dollar in exchange) because costs of production in Japan, likely to be in yen, would translate into fewer dollars.

Step-by-step solution

Understanding passage

From the article, 'That was an easier decision when a dollar bought 120 yen two years ago,' it can be deduced that in 2017 it took more than 120 yen to exchange for a dollar. This is because it states that it was easier when a dollar could be exchanged for 120 yen, implying that such is no longer the case.

Implications on Toyota's decision

Concerning why Toyota's decision to produce 3 million cars in Japan might have been easier two years ago can be reasoned as follows: If it now takes more yen to exchange for a dollar, the yen has weakened against the dollar. This means that the production costs, which are likely incurred in yen, are now more expensive when converted into dollars. Thus, it was easier to decide to produce in Japan when the yen was stronger (i.e. when fewer yen could be exchanged for a dollar).

Key concepts

Currency Valuation

Currency valuation refers to how much one currency is worth in terms of another. It is determined by a variety of factors such as economic conditions, interest rates, and market perception. In 2017, as mentioned in the article about Toyota, the value of the yen compared to the dollar had dropped compared to two years prior.
This means that more yen was needed to buy the same amount of dollars. A weaker yen implies that Japanese currency has less buying power internationally. When the dollar could be exchanged for fewer yen (120 yen to a dollar), the yen was stronger. This directly impacts international operations and decision-making for companies engaged in global transactions.
For a company like Toyota, a stronger yen reduces the cost of importing goods and services paid in foreign currencies. As it weakens, costs increase for materials or components purchased abroad, making fiscal management more complex.

International Trade Economics

International trade economics involves the exchange of goods and services across borders, which requires dealing in multiple currencies. Currency exchange rates play a crucial role here, as they impact trade balances and the relative cost of goods between countries.
For trading nations like Japan, a fluctuation in currency valuation can affect export viability. When the yen is strong, Japanese exports are more expensive to international buyers as they must spend more local currency to get the same amount of yen. Conversely, if the yen weakens, exports can become more competitive as they become cheaper in terms of other currencies.
This balance affects the decisions companies make regarding where to produce goods. With a weaker yen in 2017, Toyota's decision to produce in Japan meant higher costs in terms of yen relative to dollar earnings. This presents challenges in pricing strategy and supply chain management.

Impact on Production Decisions

The fluctuation in currency values can significantly influence a company's production decisions. For a company like Toyota, whose operations span multiple countries, understanding currency exchange rates forms a core part of its operational strategy.
When the yen was stronger (120 yen per dollar), Toyota found it feasible to produce more in Japan since costs incurred in yen did not translate into excessive expense in terms of dollars. A weaker yen in 2017 made it more costly to produce domestically when earnings from sales abroad were converted back to yen.
Therefore, companies must consider such economic indicators when deciding on production locations. This includes evaluating whether to produce domestically or internationally to optimize costs and maintain competitive pricing.

• Exchange rate stability is key for predictable cost management.
• Production location influences supply chain efficiency and cost.
• Businesses may shift production to locations with favorable currency conditions.

Such strategic decisions ensure companies like Toyota can sustain global competitiveness in ever-changing economic environments.