Name: Shilpi Sinha

Roll Number: G20039

JAPANESE AUTOMAKERS RESPOND TO ENDAKA

XLRI Jamshedpur
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 2

Abstract

This paper is analyzing the Endaka – a word that translates to a Yen expensive recession.

Japan is an export-based economy, and when the Yen strengthens against the dollar or any

major currency, the profit margins of the Japanese firms decrease, and the Japanese

economy falls into recession. This paper will be focusing on what happened to the Big Four

automakers in 1985 when the Yen was sharply revalued and then again in 1994-95 and why

these changes occurred. Furthermore, how the Japanese firms respond to these changes in

both the years and how was the response different from earlier. It would also identify the

major stakeholders and how they managed their effectiveness and also the lessons that can

be learned from the restructuring and innovative thinking shown by Japan’s automakers.
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 3

Introduction

The Yen, which is the third-most commonly used currency in the world, closely behind the

U.S. dollar and euro is seen as the proxy for Asia for decades. Even when China’s yuan is

rapidly growing in importance, the lack of flexibility and status of the Yen means that it still

functions as the preferable measure of the Asian reserve currency. However, the most

exciting characteristic of the Japanese yen happens to be its long history of zero rates. In the

1990s, Japan pioneered the idea of zero rates. Only very few countries have managed to

maintain interest rates at near or below zero. This feature also signifies that the Yen is one of

the most popular currencies for funding and the low cost of borrowing in Yen makes it an

attractive medium to fund purchases of currencies and eventually investments with effective

interest rates and yields. Its popularity for funding was such that it was the choice of a

popular funding currency for institutional and individual investors in the recession of 2008,

and some argued it played a significant role in then.

The Yen expensive recession since 1985, was a turning point for the Japanese automobile

industry. The strategies that they adopted and the lean production mechanisms they

developed during the period became a benchmark for the world. They completely overhauled

the business structure and while the strengthed the overseas production and restructured the

business systems, which means that even today they are the world leaders of automobile

production.
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 4

The events that happened to Japan’s Big Four automakers in 1985, and then again in
1994-95
In 1985 continuing to 1995, the continuing escalation of Yen against the dollar curtailed the
Japanese exports to such an extent that the big four Japanese automakers started to feel the
crunch in profits. This was termed as ‘Endaka’ and was first coined when the financial heads
of the G7 countries signed this accord in 1985 in the Plaza Hotel of New York, merely calling
it the Plaza Accords of 1985. These countries were U.S., West Germany, Japan, France and
the U.K. These accords were a response to the rising protectionist sentiment in the USA
which demanded that the U.S. car manufacturers should be provided relative price
competitiveness by increasing the overall cost of Japanese cars by artificial Yen appreciation.
The U.S. felt that the dollar was undervalued, and the other currencies should be strengthened
against the dollar.

This was a turning point for the Japanese automobile industry. Since the 1980s, the Japanese
automobile industry has had a significant impact on the global auto industry. From 1975 to
the end of 1994, the Yen appreciated in nominal terms by 68%, i.e. from 310 Yen per dollar
to 100 Yen per dollar. Moreover, this appreciation was incredibly rapid in the late 80s and
early 90s. This Endaka or high Yen raises concerns about the deindustrialization of the
Japanese auto industry. It is known that a strong Yen made Japan a less hospitable place for
the production of tradeable goods. Furthermore, it was suspected that manufacturing
industries would establish their plants in some other place. Japan faced long-term structural
challenges due to the Plaza Accord.

Since the 1980s, the U.S. was a profitable market for the Japanese auto industry. However,
post the oil shocks of 1973 and 1979, people started demanding small and fuel-efficient cars
and the Japanese manufacturers were experts in fulfilling this requirement. The brands
Toyota, Nissan, Honda and Mazda, were synonymous with efficient and well-designed cars.
Compared to its competitors, Japanese cars could create a price difference of $1000-$2000
due to the cost advantage of labour and technical prices. Their profits from the foreign
markets were rising due to the lower exchange value of the Yen.

So in 1985, due to the coordinated intervention of the foreign exchange markets from the
governments of the five leading industrialized countries; the US, France, Japan, Great Britain,
France and West Germany, who wanted to be said that the market imbalances needed
correction, the price of the dollar was artificially lowered. They assumed this would correct
the trade deficits between Japan and the U.S. and eliminate protectionist demands. They also
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 5

wanted exports to increase, not only from Japan but all other nations. The very next day, the
Japanese government unloaded $3 billion worth of Yen in the markets of New York and
Tokyo. Endaka had hit.

The firms that did not manage to sell the dollars in the short run suffered huge losses,
however, it was estimated that in the long run this would increase the purchasing parity of
Japan and could be considered favourable. Nevertheless, the Japanese automakers were
severely hit. The dollar price at which they sold their cars was suddenly very high, and if they
increased prices, they were chewing away their profit margins.

In order to remain competitive, strong efforts had to be made, and the Japanese response was
impressive. The strategy was to cut costs, diversify the products and increase prices. The
austerity measures that were introduced were some of the most cost-efficient and stringent in
the world. Toyota led the pack with its trim in the production process and cost-cutting
measures.

When the Yen was strong, Japanese manufactures could avail foreign inputs for relatively
cheap costs, and they could easily exercise this option to adapt to their production process,
making it efficient. However, by moving the production facilities directly into the U.S., they
were able to handle the shift in exchange rates in an overall manner. In this way, the
manufacturers were able to eliminate any negative influences on their prices by the exchange
rate difference.

These automakers completely overhauled their production line and diversified their products.
They also introduced products of higher profit margin and luxury segment vehicles. For some
time, the change in the Yen to dollar value was not reflected in the prices of the cars, but
eventually, the prices were raised, and the prices rose by 40%.
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 6

The Japanese firms’ response to the 1985 changes and what they did differently in 1995

With the onslaught on prices brought about by Endaka, the Japanese firms were
determined to survive and succeed. The Big Four automakers banded together and
devised a strategy that would not only help them navigate the rugged terrain of the
recession but also help them emerge as global leaders.
They adopted multiple layers of strategy that were favourable to them in both
short term and long term operations. In the short term, they did nothing. This strategy
was to confuse and disarm the Japanese government and the partners, as they might
be expecting a sudden deduction in prices and down-sizing.
The second strategy was to establish its manufacturing plants in the west. This
offshore manufacturing meant that combined with their lean production measures, the
process of cars would not be severely hurt, and the value of Yen would not present as
a conflict. They could preserve their profit margins and expand their market presence.
They also invested in advertisement programs, just like the U.S. carmakers, and they
gained much more back from their investments.
With the ASEAN countries presenting an abundance of labour and material for the
establishment of manufacturing plants, they could also tap into this market and
establish their operating bases. They also restructured their manufacturing processes
and developed several models which helped them establish their strategies in the long
term production.
In 1991 the world entered a global recession and with already cost-efficient
production and tight profit margins. The manufactures had to utilize production
capacity in order to maintain production efficiencies fully. However, with decreasing
demand, it was almost impossible to avoid operating with excess capacity. The lower
sales resulted in lower profits. The auto manufactures no domestic back up sales as
the Japanese economy was in recession as well. With over 40% of Japan’s auto
industry still devoted to exports, the appreciating yen drove the dollar price of
Japanese cars even higher, especially in the U.S. market.
In 1993, when the Super Endaka hit, the Japanese carmaker had to face sales losses
like never before. This time the Japanese automakers had to implement different
strategies in order to fight the effects of Super Endaka. The profit margins could not
be lowered more and more pressure was put on the suppliers, and sales prices raised
even further. The steady increase in price gave dealers less and less flexibility in
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 7

negotiating prices and downsized their respective margins per sale. In order to
maintain sales, the Japanese manufacturers resorted to marketing and advertising to
create sales volume and product efficiencies.
However, in the context of the continuous appreciation of the Yen, the Japanese
manufactures finally chose to give a stronger emphasis on restructuring the global
strategy. Domestic production did not longer constitute a competitive advantage as
labour costs went up had to reach another level of cost-cutting. The growing
opportunities in Asia – a division of labour, the opening of Asian markets and
expectations for growing customer bases encouraged allocation of FDI in Asia,
especially the ASEAN area offered great potential for increased overseas purchase of
input and production. This way, they succeeded in offsetting some of the Super
Endaka effects. It is possible that the Japanese manufactures would have benefited
from moving production to Asia at an earlier point in time. However, then it is also
questionable whether those markets were ready at that time.
The Big Four expanded their presence in Asia, mainly to China, Thailand and the
Philippines and have reduced their production in Japan. Japanese manufactures are
regarded as being disloyal to their country when moving production to other
countries. This internal pressure might have limited their strategies to some extend.
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 8

Identify the major stakeholders from the case, who were effective? Who were not
effective, and why?
The effects of the first Endaka in 1985 were severe on the Japanese automobile sector and the
market in general. Since the Japanese economy was heavily reliant on exports, and almost
58% of its production was exported, the significant competitive advantage that the Japanese
automobile maker had on their U.S. counterparts were the cost-effectiveness. However, the
appreciation of yen against the U.S. dollar was going to increase the prices of Japanese cars
as compare to the U.S. cars, removing its cost advantage.

These were the major stakeholders from the case and how effective or ineffective their
strategies were:

U.S. Government: The U.S. government had set out to regulate and control the currency
market to boost the dollar and in turn, the economy. The government of President Ronald
Reagan, who followed the policy of trickle-down economics, gave many tax breaks to the
corporations. This also could not help the economy as much recession followed the decision.

U.S. Auto Industry: It was expected that the U.S. automakers would not be happy with the
advent of the Japanese production plants in their home territory. The Japanese automobiles
almost captured the U.S. market for automobiles. The cost-efficiency of the Japanese vehicles
and their light design and fuel efficiency was not something the U.S. automakers could
compete. The U.S. automakers also did not conduct any aggressive marketing strategies to
attract more customers towards them. They also did not sacrifice their profits and controlled
the prices of their cars. They were also slow in adopting cost-cutting measures like their
Japanese counterparts.

Japanese Auto Industry: The austerity measures imposed by the Japanese automakers on
themselves reflected int their efficient production and management. It also is evident by the
increasing returns, growing market share and overall sales growth of Japanese manufacturers.
Even after dipping sales during 1984 to 1994 due to the fluctuation of the exchange rate, all
of the Big Four Japanese automakers were able to maintain a positive sales growth on
average with Toyota, Nissan, Mazda and Honda having an average sales growth of 17%, 2%,
1% and 7% respectively.

Domestic Markets of Japan: Japan’s trade patterns have indeed changed radically since the
mid-1990s, with a general reorientation of its import and export trade toward Asia and
significant changes in the composition of its trade. Japan now exports more parts and
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 9

components and semifinished goods relative to capital goods, with much of the flow going to
China for processing, assembly, and re-export. At the same time, Japan’s imports have swung
toward parts and components and capital goods produced in China. However, the domestic
market of Japan went through a bubble economy and recession.
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 10

What lessons, if any, can other firms take from the response of Japan’s automakers to
Endaka?
Japanese auto manufacturers had a difficult time with restructuring, and the rising yen has
offset the fruit of these three years of restructuring. About ¥400 billion worth of restructuring
was lost over radically fluctuating exchange rates. Nevertheless, through this restructuring
experience, Japanese automakers trimmed their fatty R&D and parts cost. They could now
move forward with lean optimization, which combines a system of R&D, parts purchasing
and production without massive layoffs of key intelligent, skilled workers on the shop floor.

Japan’s domestic economy also experienced substantial fluctuations in the latter half of the
1980s. Since the late 1980s to the early 1990s when the asset price bubble emerged and
expanded, there was a rapid and massive appreciation in asset prices, a significant surge in
money credit and supply, and the expansion of economic activity for a period. During the
subsequent period of the bursting of the bubble from the early 1990s, Japan experienced a
plummet in asset prices, the accumulation of substantial nonperforming assets and resulting
difficulties faced by financial institutions, and a prolonged recession.

Monetary policy also affected the financial system through the behaviour of financial
institutions and macroeconomic conditions. When financial system stability is to be achieved,
it is essential to maintain not only a favourable macroeconomic environment but reduce
interference in the financial institutions.
JAPANESE AUTOMAKERS RESPOND TO ENDAKA 11

References
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https://www.businessinsider.com/sc/why-the-japanese-yen-matters-2019-12?IR=T

Restructuring and Global Strategy of the Japanese Automobile Industry and Its Perspective.

(1995). Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?

doi=10.1.1.115.8226&rep=rep1&type=pdf

The Asset Price Bubble and Monetary Policy: Japan’s Experience in the Late 1980s and the

Lessons. (2001). Retrieved from

https://www.imes.boj.or.jp/research/papers/english/me19-s1-14.pdf

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

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

Wikipedia contributors. (2019, February 11). Endaka. Retrieved from

https://en.wikipedia.org/wiki/Endaka