MACROECONOMIC THEORY AND POLICY

Japan’s Automakers Face Endaka

Submitted by: Anisha Mathur (BD21008)

I. Case background

The case “Japan’s Automakers Face Endaka” discusses in detail the situation of
high yen to dollar exchange rates (dubbed endaka) during the 1980s and 1990s. The
case focuses on the impact that the Plaza Accord of 1985 and the subsequent
appreciation of yen had on the industrial landscape of Japan, with particular attention
to the automobile sector.

The impact on the automobile sector is studied by focussing on The Big Four of the
Automakers sector – Toyota, Nissan, Honda and Mazda adopted unprecedented
measures to deal with the severe effects of Endaka and Super Endaka and regain the
benefits and cost competitiveness as well as efficiency that the sector enjoyed prior
to the Plaza Accord and the exchange rate appreciation.

II. Critical Issues and Challenges

1. Plaza Accord of 1985

Endaka (high yen) became popular parlance post the Plaza Accord in 1985. This
inter-governmental arrangement set the base for the historic rise in the forex value
of yen and setting in motion a series of events.

The rising sentiment of protectionism amongst the US citizens pushed the

Republicans and Democrats to unite and host a meeting with the leaders of the
world’s biggest capitalist economies to lower the value of dollar against the yen
and correct the rising trade imbalance in the United States.

The Japanese government thereby, agreed to adopt a “flexible management of

monetary policy with due attention to the yen rate.” The succeeding day, massive
amounts of dollars were sold in the forex markets by the US government and
nearly $3 billion were dumped in the New York and Tokyo markets in exchange
for yen by the Bank of Japan. This strengthened yen relative to the dollar and set
off the situation of endaka in the Japanese economy.

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 2. Heavy Dependence on Exports

Ever since the end of World War II, Japan’s growth and development has been
fuelled majorly through exports. Nearly 3.5% of Japan’s GNP can be attributed
to net exports, making the country more dependent on trade than any other
country in the world.

This did not fare well for the country as the yen started to appreciate consistently.
The exports kept on becoming more and more expensive and manufacturers being
forced to adopt survival techniques of skimping on wage increases, negotiating
with suppliers to reduce costs of raw materials, etc. However, endaka pushed the
businesses to implement stricter and more hostile measures. Nearly 59% of the
country’s manufacturers seriously considering moving production facilities
abroad.

3. Highly Competitive International Markets

Japanese cars, due to the cost efficient and lean manufacturing techniques, proved
to be highly competitive in the US markets. Till 1985, the automakers’ success
was attributable almost entirely to the low-end compact cars. However,
competition from low-cost Korean and East European entrants, introduced the
high margin segments in the automobile sector to the Japanese manufacturers.

Yet, the Japanese manufacturers were hesitant to raise prices even in the high-
end market segment due to the highly competitive US markets. As a result,
despite the 35% appreciation in yen against the dollar in 1986, the automobile
prices only saw a 10% rise in prices. This seriously ate up on the profit margins
of businesses as well as their import income.

III. Case Analysis and Interpretation

1) The Plaza Accord of 1985 and the Birth of Endaka

The 1985 inter-governmental meeting of the world’s financial officials at the

Plaza hotel in the United States set the base for the situation of rising value of yen
in Japan. The strengthening of the US dollar against yen led to trade imbalances
in the US. In order to fix this issue, the world leaders under the Plaza Accord
declared dollar to be overvalued relative to the yen. As a result, the Japanese
government adopted a “flexible management of monetary policy with due
attention to the yen rate.”

The economic impact of the Plaza Accord was immediate with the dollar price
dropping from ¥240 in the year prior to the Accord to ¥150 in a period of 12
months. The sudden appreciation of the yen costed many corporations millions

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 of dollars of losses. However, the exporters, particularly the small and medium
sized exporters who faced the true brunt of endaka.

This called for a complete restructuring of the economy and reducing emphasis
and dependency on exports. This was a radical change for the Japanese economy
due to its history of building a strong and growing economy on the foundation of
exports, especially in the auto sector.

2) Impact of Endaka on the Japanese Automobile Manufacturers

Prior to 1985, Japanese automakers enjoyed a period of unprecedented prosperity.

The auto mobile sector was especially flourishing in the international markets due
to their cost competitive, fuel-efficient, light weight and premium designed cars.
The US and European markets saw a “Japanese invasion” with Japan accounting
for 20% of passenger car sales in the United States.

In Japan, nearly 58% of total vehicle production was accounted to export sales.
This made the Japanese auto industry one of the most export reliant industries in
the world. One of the main reasons for the Japanese dominance in the markets
was the low exchange value of the yen. With endaka, this cost advantage was to
a large extent obliterated.

The Plaza Accord was initiated to curb the Protectionist sentiments amongst the
American public. The advent of endaka as a result of the Accord, had negligible
effect on quelling this protectionist sentiment in the US market. Instead, despite
the rising yen value, the US trade deficit widened, strengthening the
protectionism cries in the US especially in the automobile sector.

The Japanese Response

The traditional response of limiting exports and cutting costs were not sufficient
to meet the demands of the challenges posed by endaka. The Big Four Producers
in Japan, in addition to costs cutting, implemented certain austerity measures such
as trimming overtime, reworking the working days in a week so as to ensure the
least electricity costs and purchasing parts and raw materials at low prices from
the suppliers. In a more radical response, the automakers decided to shift the
manufacturing base from Japan to the US market directly.

Off-shore manufacturing plants or “transplants’ helped the Japanese businesses

set a foothold in the less expensive US market becoming a significant feature of
the industrial landscape of US by 1989. However, as the yen continued to
appreciate, this resolve eventually broke down. Between 1985 and 1988, the
sticker prices for Japanese cars rose by 40%.

Endaka though challenging for the automakers was not a life-threatening

phenomenon. However, endaka coupled with the global recession of 1991 hit the

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 automobile sector hard. The demand for new cars dropped significantly, leaving
the automakers with excess capacity. In 1991, all of the Japanese automakers
reported drops in production and sales.

3) Super Endaka

The year 1993 saw another round of shift in exchange rates. The problems for
Japan compounded with the onset of super endaka with the yen appreciating more
and more against the dollar.

Even after the economic restructuring, nearly 40% of the total capacity in Japan’s
auto industry was devoted to exports. Super Endaka led to a further decline in
sales in all of the international markets, especially the US markets. The European
markets though less impacted by endaka, posed issues due to the imposition of
trade barriers, limiting the ability of Japanese manufacturers to expand operations
and exports to make up for the US losses.

Response to Super Endaka

By 1985, the yen had hit a record level of ¥80.63 to the dollar. It was observed
that a one-point increase in the value of the yen erased nearly $111 million in
dollar-dominated profits.

The auto mobile sector saw further cost cuts, selective price increases and high-
stake negotiations with suppliers for low-cost materials.

Selective Price Increases

In order to combat the impact of super endaka, the Japanese automakers raised
both the wholesale and retail prices, with the bulk of the price raise resting on the
wholesale level and leaving the retail dealers with smaller profit margins and less
opportunities of showroom bargaining.

The price rise was concentrated majorly on the low-volume cars leaving the
family sedans that formed the bulk of the Japanese overseas car market
unaffected. This however, still costed Toyota an average of $45 on every vehicle
sold. The US car manufacturers, on the other hand, reported $1,259 unit profit
(data for Chrysler).

Another unprecedented move by the Japanese manufacturers entailed the

adoption of new marketing and advertising campaigns and strategies as a means
to increase the sales volumes in the face of the rising prices and accumulated
capacity.

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 4) Japan’s Dilemma

The most radical move by the Japanese businesses was the deliberation over
moving the manufacturing facilities outside of the Japan and US and move base
to Asia. This decision was highly criticised by the general public as fear of rising
unemployment settled in the minds of the people.

As a result, the cultural and political pressures prevented most of the Japanese
companies from moving significant production capacity out of Japan.

IV. Macroeconomic Theory/Tools

1. Exchange Rate

The value of one currency (local currency) in terms of another currency (foreign
currency) is known as Exchange Rate. The value of a country’s currency in a free
(floating) foreign exchange market system is a function of the demand and supply
of the currency. Thus, the value of the currency does not remain constant but
fluctuates.

The rise in the value of the local currency in the foreign exchange market is
known as currency appreciation.
For example, US$1 which was equivalent to INR 73.76 in December 2020, today
(December 2021) exchanges for US$1 = INR 75.44. Thus, we can say that the
US dollar has appreciated in value with respect to Indian Rupee over a period of
12 months.
A currency appreciation is beneficial for the importers. The value of the local
currency increases against a foreign currency. Now the same unit of dollar (or
any other currency) can buy more goods from the foreign market as compared to
earlier.

Similarly, the fall in the value of the local currency in the foreign exchange
market is known as currency depreciation.
For example, in the given case, the USD depreciated from US$1 = ¥250 in the
1980s to US$1 = ¥81 in 1995.1

Therefore, a currency depreciation is beneficial to the exporters. It makes

domestic goods more lucrative for foreign buyers since they would have to spend
less for each unit of good. Let us say, the US dollar appreciates from ₹60 in year
1 to ₹75 in year 2. A commodity costing ₹180 per unit or $3 per unit in year 1,
would now cost the foreign buyer only $2.4 per unit, thus boosting the export
market.2

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Appreciation and Depreciation of Currency | Currency Appreciation and Depreciation - Khan Study
2
Currency Appreciation Definition (investopedia.com)

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 2. Balance of Trade (BoT)

A trade deficit is a situation where a country’s imports exceed its exports. There
is a net outflow of cash/resources in this case. It is also referred to as negative
balance of trade.3

There is a close relationship between the Balance of Trade of a country and the
currency exchange rate for that country. The BoT affects the exchange rate of the
country through its impacts on the demand and supply of foreign currency.

A country that is dependent on exports more than the imports, naturally enjoys a
high demand for its goods. The high demand increases the supply of foreign
currency in the market pushing the forex rate down. The reverse is true for a
country that imports more than it exports. Major dependency on imports raises
the demand for foreign currency, pushing the exchange rates upwards.

Similarly, depreciation and appreciation of exchange rates make exports and

imports more lucrative respectively. This in turn has an impact on the balance of
trade.

3. Unemployment Rates
Unemployment Rate refers to the proportion of people without a job from
amongst those who are able and willing to work (referred to as the workforce).
The case talks about how the rising Yen forced many automobile manufacturers
to shift base outside of Japan to USA, Europe and Asia. With outsourcing of
manufacturing process becoming more lucrative, the unemployment rate in Japan
started to rise and reached it is peak and unprecedented high of 3% in 1995. This
created a sense of hostility in the Japanese public towards organisations and
businesses investing outside.

V. Learnings from the case:

One of the major learnings from the case comes from the importance of developing
efficiency to remain competitive in the market. The Japanese automakers are famous
for their highly mechanised and detailed operating procedures that ensure high levels
of efficiency. Toyota is famous for introducing to the business world the concept of
Lean Manufacturing. As a result, the businesses are able to build high efficiency
levels and enjoy the benefits of cost competitiveness without compromising on
quality and build.

Another learning from the case is that of resilience. Japan had to endure the effects
of endaka for over a decade. The resilience and determination of the businesses and

3
Trade Deficit Definition (investopedia.com)

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 their leaders in such a harsh environment ensured the survival of all the businesses
in Japan.

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