Toyota Motor Company
Toyota is the largest Japanese auto company and the fourth largest non-U.S. industrial firm in the world. Over half of its sales are overseas, primarily in the United States. If the yen appreciates, Toyota has the choice of keeping its yen price constant or its dollar price constant. If Toyota holds its yen price constant, the dollar price of its auto exports will rise and sales volume will decline. On the other hand, if Toyota decides to maintain its U.S. market share, it must hold its dollar price constant. In either case, its yen revenues will fall.
If Toyota decides to focus on the Japanese market, it will face the flow-back effect, as previously exported products flow back into Japan. Flow-back occurs because other Japanese firms, finding that a high yen makes it difficult to export their cars, emphasize Japanese sales as well. The result is increased domestic competition and lower profit margins on domestic sales.
Toyota’s yen production costs will also be affected by yen appreciation. Steel, copper, aluminum, oil (from which plastics are made), and other materials that go into making a car are all imported. As the yen appreciates, the yen cost of these imported materials will decline. Yen costs of labor and domestic services, products, and equipment will likely stay the same. The net effect of lower yen costs for some inputs and constant yen costs for other inputs is a reduction in overall yen costs of production.
The net effect on profits of lower yen revenues and lower yen costs is an empirical question. This question can be answered by examining the profit consequences of yen appreciation. Here, the answer is unambiguous: Yen appreciation hurts Toyota; the reduction in its revenues more than offsets the reduction in its costs.Toyota Motor Company