Since the year 1995, the Japanese Yen has witnessed many intense swings; however, none of them were as extensive as the prominent ten years after the Plaza Accord. Unfortunately, it changed the structure of Japan’s economy and the mindset of its business people and politicians. In 2007, the Japanese Yen gained strength, and it smashed through the 80 JPY/USD levels in the latter half of 2011. The above trend again reversed and sharply did so when the new government was chosen, led by Mr. Abe in Japan, and the appointment of Mr. Kuroda- the new governor of the Central Bank of Japan.
Kavan Choksi Japan– the impact of the exchange rate on the economy of Japan and market volatility
Kavan Choksi Japan is a leading investor, business expert, and wealth consultant well known for his invaluable expertise in finance and economics. He has helped many global businesses, especially in the UAE, Japan, and other parts of the globe, to earn lucrative returns from the investments they have made.
The appreciation of the Yen after the Plaza Accord
According to him, the appreciation of the Japanese Yen for ten years after the incorporation of the Plaza Accord and the volatility of the exchange rate in the nation forced several manufacturers to reconsider export models. They had to think about whether to build their goods in Japan and sell them to foreign countries. The above trend did impact profitability as Japan went rapidly from being a low-cost manufacturer to a region where labor was expensive. Even without the strong impact that the above had on the nation, for Japan, it was more affordable to produce their goods in foreign lands.
The onus to look overseas for a solution
Besides the above, it was challenging politically to export products to the USA, where the competition was local. The people in the USA saw companies like Sharp, Panasonic, and Sony literally devour the manufacturing industry for televisions, and they were not keen to allow this trend to affect their other strategic national sectors like automobiles. Hence, there was an era of political tension revolving around trade, and new barriers for exports from Japan surfaced, like limits on Japanese exports to the USA for sale and voluntary quotas on automobiles.
Reasons behind the shift – goals to rebalance the Japanese economy
Kavan Choksi Japan states at that time, the companies in Japan have two solid reasons to establish factories overseas. This step would result in more stable profits in the wake of an exchange rate that was highly volatile and alleviate the costs of labor. A classic example of the above is Toyota.
The bottom line here is the appreciation of the Japanese Yen against the dollar after the implementation of the Plaza Accord, and the volatility of the exchange rate rebalanced the manufacturing industry in Japan, where production largely shifted to foreign lands on an extensive scale. The companies have become stable, and they are immune from the fluctuations of the exchange rates in the country, leading to the financial stability of Japan’s domestic economy.