BUS FPX 4016 Assessment 3 Currency Exchange Risks

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Capella University

BUS-FPX4016 Global Business Relationships

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Understanding the Impact of Currency Exchange Rates on Japanese Exports to the U.S. Market

In today’s global economy, many products sold in the United States are sourced from international markets, and understanding the effects of currency exchange rates is crucial for businesses. One of the key currencies affecting trade between Japan and the U.S. is the Japanese yen. This article explores how the exchange rate between the yen and the U.S. dollar influences the cost of Japanese products in the U.S. market, and how fluctuations in the exchange rate can impact profitability for exporters.

How Currency Exchange Rates Affect International Trade

Currency exchange rates play a significant role in international trade. When products are imported from foreign countries, the cost of those goods can vary depending on the value of the foreign currency compared to the domestic currency. In the case of Japanese goods sold in the U.S., the exchange rate between the Japanese yen and the U.S. dollar is a key factor in determining the cost for American consumers.

Currently, the exchange rate between the Japanese yen and the U.S. dollar stands at approximately 105.62 yen to 1 U.S. dollar, meaning that the yen is relatively weak in comparison. For every yen spent, it is worth approximately 0.0095 U.S. dollars (Japanese Yen Exchange Rates Table Converter, n.d.). This weaker yen makes Japanese products more affordable for U.S. buyers, as businesses importing goods from Japan can purchase them at a lower cost in U.S. dollar terms. As a result, American companies that import Japanese products can achieve a competitive pricing advantage, potentially driving higher profits.

The Impact of Exchange Rate Fluctuations on Profitability

While a weaker yen can benefit U.S. importers by reducing the cost of Japanese goods, fluctuations in exchange rates present a potential risk to profitability. The value of the yen relative to the U.S. dollar can change due to various economic factors, such as inflation, interest rates, and market speculation. Even minor shifts in the exchange rate can have a significant effect on the cost of imported goods.

For instance, if the yen strengthens against the U.S. dollar, the cost of importing goods from Japan could rise. This would increase expenses for U.S. businesses, potentially reducing their profit margins. On the other hand, if the yen weakens further, U.S. companies could benefit from lower import costs, leading to higher profits.

To mitigate the risk posed by exchange rate fluctuations, many businesses opt to transact in a stable currency, such as the U.S. dollar, rather than engaging directly in yen-based transactions. By doing so, they can reduce their exposure to exchange rate volatility and maintain more predictable financial outcomes (International Trade Association, n.d.).

The Risks Associated with Currency Exchange for Exporters

For exporters in Japan, the risk of currency exchange fluctuations is also significant. A major concern is the potential devaluation of the yen. If the yen loses value against the U.S. dollar, the price of Japanese goods becomes less competitive in international markets. This could lead to a reduction in demand for Japanese exports, hurting the profits of Japanese exporters.

The devaluation of the yen can result from various factors, including economic instability or inflation in Japan. When inflation causes prices to rise domestically, it can erode the purchasing power of the yen, making it less attractive for U.S. buyers to import Japanese products. As a result, Japanese manufacturers and exporters may face difficulties in selling their goods abroad, especially if U.S. companies turn to alternative suppliers from countries with more stable currencies.

Managing Exchange Rate Risks in International Business

Both Japanese exporters and U.S. importers need to actively manage exchange rate risks to protect their profitability. For Japanese exporters, one potential strategy is to hedge against currency fluctuations by using financial instruments, such as forward contracts or options, to lock in favorable exchange rates. This can provide a level of security, ensuring that the value of their goods remains competitive, even if the yen fluctuates.

For U.S. importers, it is important to monitor exchange rate trends and adjust pricing strategies accordingly. By understanding the direction of the yen-to-dollar exchange rate, businesses can anticipate changes in costs and adjust their pricing or sourcing strategies to maintain profitability.

Additionally, diversification of suppliers and markets can help businesses reduce their reliance on a single currency. By sourcing products from multiple countries with different currencies, companies can minimize the impact of fluctuations in any one exchange rate.

Conclusion:

Currency exchange rates are a vital component of international trade, with significant effects on the cost and profitability of goods sold across borders. For U.S. companies importing Japanese products, the current exchange rate of a relatively weak yen offers cost-saving opportunities. However, exchange rate fluctuations can create risks that may impact the financial stability of both exporters and importers.

To mitigate these risks, businesses on both sides of the trade relationship must stay informed about exchange rate movements and take proactive steps to manage their exposure to currency fluctuations. By adopting risk management strategies such as hedging, diversification, and pricing adjustments, companies can navigate the complexities of currency exchange and ensure the long-term success of their international trade operations.

References

Chen, J. (2020, August 28). Currency Risk. Retrieved October 10, 2020, from https://www.investopedia.com/terms/c/currencyrisk.asp

International Trade Association. (n.d.). Foreign Exchange Risk. Retrieved October 10, 2020, from https://www.trade.gov/foreign-exchange-risk