Japan’s Automakers Face Endaka

Introduction

The Japanese yen has a history of violent swings, between its exchange rate with other
countries for the last 30 years. Way back in the early 1980s, the yen was trading somewhere
between 200 and 270 per dollar. In September1985, a joint agreement was made at Plaza
Hotel in New York City known as the Plaza Accord, whose aim was to depreciate the US
dollars in relation to Japanese yen and German Deutsche mark. The agreement was signed
by the world’s leading Western economies, which included five countries namely France,
West Germany, United States, United Kingdom and Japan. Through currency control, it
intended to increase the competitiveness of American and European exports in relation to
Japanese exports. The Plaza Accord resulted in the yen getting stronger for the next 10 years
and the exchange rates reached close to 80 yen per dollar. The appreciation of yen was
close to 184%. The strengthening of yen hit employment and consumption in Japan. The
domestically based car manufacturing sector was also impacted. The yen strength was
disadvantageous for the Japanese exporters selling to American consumers, including the
four big car manufacturers, namely Toyota, Nissan, Honda, and Mazda. However, the rising
yen benefited the companies conducting mergers and acquisitions and Japanese tourists.
There was a collapse in asset value, banking problem, deflation, and a reduced pace of real
economic growth.

The “Endaka”

Endaka means “expensive yen,” which was first coined in 1986. It is a state in which the
value of the yen is high in comparison to other currencies. The high valuation of the
currency is detrimental to an economy which is highly dependent on exports. The endaka
came into everyday use after the Plaza Accord agreement that led to the spectacular rise of
yen. The dollar had continuously strengthened against the yen During the first half of the
1980s pulled up by the high-interest rates. It appreciated 30% between 1981 and 1985. The
rise in dollar value led to massive increases in the United States' trade deficit and caused
sudden inflows of foreign capital. The high dollar value led to the decline of employment
levels in core manufacturing sectors like automobiles, textiles, and steel. By mid-1985,
people started advocating the economic policy restricting imports from other nations by
imposing tariffs on imported goods, import quotas, and other government regulations. The
labour and business leaders demanded that the United States government take proactive
measures to decrease dollar value. Republicans and Democrats, when faced with the
collective and robust demand, together, came forward to devise a policy of shielding the
country's domestic industries from foreign competition. They rallied around regulation to
restore a beneficial trade balance. The eventual outcome of this concern was the joint
meeting under the sponsorships of the United States in September 1985, made in Plaza
Hotel known as the Plaza Accord by the finance ministers of the world's largest capitalist
economies namely the United States, Britain, France, West Germany, and Japan. They
brought together an intervention into their respective foreign exchange markets. All the
participants shared a common interest in lowering the dollar's value relative to the yen,
hoping to depreciate the dollar, enough to reverse the continued and growing U.S. trade
imbalance.

According to the joint statement made at Plaza, the world's most powerful financial officials
contended that the dollar was overvalued as the currency traders had given too little weight
to economic fundamentals resulting in the underlying conditions of the world's economies
not been reflected fully in exchange markets. To tackle these imbalances, Japan's
government agreed to carry out flexible management of monetary policy with due attention
to the yen rate. The next day, the U.S. Federal Reserve Bank sold massive quantities of
dollars, and the Bank of Japan reportedly dumped $3 billion in the New York and Tokyo
markets in exchange for yen. The economic impact of the Plaza Accord was sudden and
strong enough to appreciate the value of yen.
Many big companies suffered huge exchange losses that had failed to sell dollars forward
quickly enough. The small- and medium-sized exporters suffered the real impact of endaka.
By 1986, most financial observers recognized that the strong yen was a market correction
and that endaka would stay in the economy. Responding to the considerably stronger yen,
Prime Minister Yasuhiro Nakasone called on the Japanese to streamline their economy by
giving exports less importance than they had been given in the past. It was an
understandable reversible strategy of Japan’s economy to deal with endaka. After the end
of the 2nd World War, Japan’s growth was driven and developed mainly by its dominant
industrial sector. In 1985, net exports comprised 3.5% of Japan’s Gross National Product,
making the country more dependent on trade than any other country in the world.

Japan could have moved away from their established export market and shifted to other
value-added sectors. In the short run, such change would have distressed the firms in the
export sectors like the automobile sector, but in the long run, it would have been beneficial
to the people of Japan by increasing their purchasing power.

Japanese Automakers response to Endaka of 1985

Japanese automakers had been enjoying prosperity both in the domestic market as well as
in the world market. The small and fuel-efficient cars found ready acceptance with buyers in
Europe and North America and the market share for passenger car sales were 20% and 10
%, respectively. Export sales accounted for 58% of total vehicle production in Japan.
Japanese cars were cheaper, fuel-efficient, lighter, and better designed than their European
and American rivals. Japanese manufacturers had a cost advantage due to labour
differences and technical efficiencies, and the lower exchange value of the yen, until endaka
hit in 1985. The cost advantage was largely destroyed, leading them to cut costs and limit
sales in the US market.

The Big Four - Toyota, Nissan, Honda, and Mazda responded by cutting costs by cutting
overtime and fixed costs to remain profitable. Several Japanese auto firms started opening
overseas plants known as “transplants” to avoid exporting from a high-priced Japanese
market. By the end of 1989, the transplants had become a considerable feature of the
industrial topography of the United States and a key component of their global operations.
Diversification was going to be their next move. The Japanese firms began to migrate into
higher-profit, luxury segments. But it was still difficult to maintain their sales level and
market share, given the appreciation of yen against the dollar, ultimately leading to a price
increase of their models.

Even with these increases and a host of other difficulties, by the late 1980s, it was assumed
that Japan’s automakers had managed to survive and thrive endaka. The Japanese firms had
increased their share of the U.S. market even though the yen rose steeply against the dollar.
There were record sales by Japan’s automakers in 1990. However, in 1991 a global recession
reduced demand for new cars, and all of Japan’s automakers posted production and sales
declines. In 1993, these problems were worsened by a second wave of exchange rate shifts.
It was the onset of super endaka. A newly appreciating yen pushed the dollar price of
Japanese cars higher and higher leading to continued sales declines, especially in the U.S.
market. By the first quarter of 1995, Japan’s auto assembly plants operated at just 78% of
capacity, with no sign of revival.

Japanese Automakers response to Super Endaka of 1995

In April 1995, the yen value surged to ¥80.63 to the dollar. To reduce the effects of the
appreciation, Japan's carmakers turned first to the approaches that had protected them in
the late 1980s. They cut costs even further, raised prices selectively, and pressured their
suppliers to reduce the components' cost. By pushing considerably on these facades, the
manufacturers managed to avert some of the severest impacts of super endaka. While
Honda started using parts directly from its 1991 generation for the newer model, Toyota
reorganized its Notomachi plant in northern Japan and minimized its use of expensive
robots. But as the yen drove higher, Japan's automakers realized that traditional cost-cutting
measures would no longer be sufficient. They had to consider far more radical changes to
thrive through super endaka.

Selective wholesale and retail prices were increased, and dealers were left with smaller
profit margins and lesser opportunity for showroom bargaining. The price increase led to
lower sales volume. So, the Big Four came up with new marketing and advertising strategies
to woo their customers. Leasing became a new trend and a central marketing tool. The low-
interest rates were allowing the companies to keep monthly payments competitive with
U.S. models. Even with continued pressure on profits, advertising budgets were also kept
intact.

Japan’s automakers were also planning for a more substantial change in their global
strategy. In continuation of their already successful transplant production programs, several
automakers were thinking of shifting their operations outside Japan. There was an
inclination towards outsourcing even before the super endaka. As compared to endaka of
1985, where the auto firms invested in the U.S. and European markets, they planned to
negotiate to build or expand production facilities in Asia due to its vastness, low-wages, and
new markets. However, with the overseas expansion in Asia, it also meant reducing
domestic production in Japan and reducing employment.

Japan’s auto industry had been struggling with the effects of endaka for nearly a decade.
The U.S. Federal Reserve Bank had doubled short-term interest rates in 1993 to enable the
dollar to rise, but the dollar continued its decline against both the yen and the German
mark. By 1995, with low inflation and solid growth in the United States, Washington had
little motivation to interfere any further with monetary policy.

Conclusion

American deficits and Japanese surpluses have characterized international trade between
the United States and Japan. This prolonged trade pattern has been a matter of debate in
academic, social, and political spheres. The American people are angered by the apparent
unfair trade policies of Japan. The academicians have debated about the discrepancy
between the economic theory of trade and its real situation. Theoretically, a strong currency
and a current account surplus cannot coexist for an indefinite period. As the yen
appreciates, Japanese imports from the United States should increase, and Japanese exports
to the United States should decrease to balance Japan's current account surplus. However,
since the 1985 Plaza agreement, both yen and Japan's trade surplus have moved in the
same direction.

There had been low savings rates and high government borrowing in the US economy, and
Japan’s economy has been producing more than its domestic consumption levels. There
were obstacles in Japan’s domestic market import due to its complicated domestic
regulations, retail practices, and commercial terms and conditions. Endaka has now become
a permanent feature of Japan's economy. There was no permanent solution, as raising
export prices would reduce sales. Although shifting production to overseas locations
appeared a suitable solution on economic grounds, it would predictably be complicated by
Japan’s domestic politics of labor and employment. Unemployment in Japan had reached a
record level of 3% in 1995. Under these conditions, Japanese companies that invested
abroad were widely condemned for their disloyalty, and for taking unfair advantages for
themselves. This pressurized and prevented them from transferring significant production
capacity out of the country, ultimately leading to reduced profit margins.

Bibliography

1. Time of Troubles: The Yen and Japan’s Economy, 1985-2008. (2009). National

Bureau of Economic Research. https://www.nber.org/papers/w14816.pdf

2. Dollar Yen Exchange Rate (USD JPY) - Historical Chart. (2020). MacroTrends.

https://www.macrotrends.net/2550/dollar-yen-exchange-rate-historical-chart

3. Council on Foreign Relations. Abenomics on the Japanese Economy,

https://www.cfr.org/backgrounder/abenomics-and-japanese-economy

4. International Monetary Fund. "Did the Plaza Accord Cause Japan's Lost Decade?"

Page 53. Accessed August 26, 2020.

5. Spar, Debora L., Julia Kou, Elizabeth B. Stein, and Karen Gordon. "Japan's

Automakers Face Endaka." Harvard Business School Case 796-030, January 1996.

(Revised February 1998.)

6. Time of Troubles: The Yen and Japan’s Economy, 1985-2008*. (2009). Econometrics

Laboratory (EML), University of California at Berkeley.

https://eml.berkeley.edu/~obstfeld/paper_march09.pdf