Wall Street Journal, Article Review Example

This article mentions that Japanese companies’ record profits may turn out to be even higher due to the recent appreciation of U.S. Dollar. Besides the depreciation of the Japanese Yen, profits are also going to be higher than expected because Japanese companies overestimated expected future Yen value while calculating their profits. Observers had been suggesting the government to prevent appreciation of Japanese Yen because it negatively affects Japanese exports and may even force some Japanese companies to move jobs and production activities overseas. Observers such as Bank of Tokyo-Mitsubishi UFJ senior dealer Mitsuru Sahara and UBS expect U.S. Dollar to further appreciate in value against the Yen. The stakes in currency exchange rates are not only high for Japanese multinationals such as Toyota, Nissan, Honda, Canon, Panasonic, and Hitachi but also for the overall Japanese economy that will benefit from a weakening domestic currency (Maxwell, 2012).

Profits for Japanese multinationals such as automobile manufacturers etc. are going to be higher due to dollar appreciation because these companies earn a significant portion of their revenues and profits in America. When the profits will be converted from U.S. Dollar to Japanese Yen in order to be reported on the parent company’s financial statements, dollar appreciation means that each dollar would yield a higher amount of yen than would have been the case, otherwise. Japanese Yen has also depreciated due to the actions taken by Bank of Japan which eased the monetary supply. The outcome was an increase in Yen’s supply that would lower the national currency’s value against foreign currencies in theory even though an increased money supply also carries inflation risk as well. In addition, most Japanese companies assumed a Dollar-Yen exchange rate that turned out to be lower than the current exchange rate. This led to an underestimation of expected future profits.

The profits for Japanese companies with significant overseas operations are further expected to improve because many observers believe that Yen is still overvalued given the national economic conditions, high debt levels, and slow growth rates. High debt levels increase the risk and lead to lower foreign investment in the country. This, in turn, results in lower demand for the currency, and hence, currency’s depreciation. Similarly, slow growth rate means the country is not producing and exporting as much as it used to and the demand for currency weakens as a result, leading to currency depreciation.

It is possible that the Japanese government and the Central Bank have given in to the industrialists demand who were urging to depreciate the value in order to spur economic growth and promote exports. Yen’s depreciation means Japanese exports will be cheaper for the customers in the U.S. and other countries and they will respond by increasing the demand for Japanese goods while Yen’s appreciation will have the opposite effect. But if Yen remains overvalued, Japanese companies may move operations overseas due to lower demand for exports and high cost of production. The currency exchange rate risk is of low concern to those Japanese companies which have limited exposure to international operations or markets or who have operations evenly distributed around the world like Sony Corporation.

Yen’s depreciation may also help the national economy recover faster because of higher exports. In addition, the multinational companies may earn higher profits when their overseas income is translated into local currency and may respond by hiring more local workers. Moreover, Japanese government may also benefit due to higher tax receipts which it could use to create jobs and undertake development projects.

Reference

Maxwell, K. (2012, February 23). Yen’s Fall May Spring Profit Surge for Japan Firms. Retrieved February 26, 2012, from http://online.wsj.com/article/SB10001424052970204778604577240831931459406.html?KEYWORDS=Exchange+rates#top