How a Currency Can Change the World

How a Currency Can Change the World Halal explained by professional Forex trading experts the “How a Currency Can Change the World” FX trading team.

How a Currency Can Change the World?

One of the most interesting aspects of the Forex market is the global implication carried behind each and every quote.

While a price may move quickly, and at times, feel fleeting; it’s often easy to forget that these prices carry heavy repercussions throughout our economies – even if your nations’ currency isn’t in the quote.

A great example of that is Japan.

Traditionally a heavy exporter, Japan’s economy is very much driven by their trade balance and the world economy continuing to purchase Japanese goods. As Yen gets more expensive compared to other currencies, it makes purchasing those goods more expensive for foreign consumers. This can be extremely prohibitive to the Japanese economy, and the companies that are trying to sell goods to those foreign consumers.

Let’s run through a very basic analogy to see how Japan is affected with a strong Yen by taking a closer look at one of Japan’s key industries and one that many of us are probably already familiar with: The Automotive industry.

Let’s say that one of the large automobile manufacturers in Japan is in the process of expanding into the United States; and has seen business from the United States become an increasingly important part of their growth strategy. If they were only able to sell cars to Japan, they wouldn’t be able to sell enough to recoup all of their overhead expenses, meaning that as a company they would take a loss without their American business; so this strategy of distributing cars to the United States is critical to their continued growth, success, and prosperity as a company.

Let’s assume that in year one, when the exchange rate of the USDJPY was at an even 100.00 level, it cost our fictitious company $20,000 or ¥2,000,000 to produce their base model automobile. This still allowed for them to pay shipping and selling expenses ($5,000 per unit, or ¥500,000 per unit) to get the total cost of the automobile – before being sold, to $25,000 or ¥250,000.

This allows them to sell the car for $30,000 or ¥3,000,000 and garner a profit of $5,000 or ¥500,000 per unit. Each car sold puts $5,000 to their bottom line.
Let’s fast forward a year, and let’s say that we’ve seen the exchange rate move down to ¥75.00 per $1. This means the yen has strengthened 25% and business has just gotten much more difficult for exporters in Japan.

While it cost the same ¥2,000,000 to produce the automobile as last year, and the same ¥500,000 to ship and sell the product; the exchange rate has made a large difference to our company.

If they want to use the same price points as the year before, they may be forced to take a loss. Since the Yen is now more expensive against the dollar, our company will probably be looking at a reduced profit. The below table will walk through a scenario in which we keep the price the same in the face of a strengthening currency.
A change of ¥750,000 in only one year has taken place for each automobile sold, and this is solely because the Japanese are looking at a more expensive yen.

This can have a grave impact on an economy, particularly one that relies on continually exporting goods.

As you can imagine, this is not a strong business strategy that many Japanese companies are interested in entertaining over the long-term, so it’s time to look at some alternative business strategies.

Let’s say that our company wants to ensure themselves of a profit. So they do the math and they see that they can gleam a profit if they raise the price to $35,000. The table below will illustrate this change in price.

How a Currency Can Change the World Conclusion

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