The Japanese economy has been in a deflationary spiral for a number of years in a country better known for $10 melons and $100 steaks. McDonald’s now sells hamburgers for 52 cents down from $1.09. 32 inch color television is down from $4,000 to $2,400 and clothing stores compete to sell fleece jackets for $8, down from $25 two years earlier. Consumer prices have dropped to a point where they are similar to those Japanese once found only on overseas shopping trips. The high prices prevalent in Japan before deflation allowed substantial margins for everyone in the distribution chain. As prices continued to drop over several years, these less able to adjust cost to allow some margin with deflated prices fell by the wayside. Entirely new retail categories — 10 yen discount shops, clothing chain selling low cost imported products from China, and warehouse style department stores have become the norm, sales and discount stores grew by 78 percent in the late 1990s. Discounting is the way to prosper in Japan which again helps fuel deflation. While those in the distribution chain adjusted to a different competitive environment or gave up, Japanese consumers were reveling in their new found spending power. Japanese tourists used to travel to the United States to buy things at much cheaper prices, but as one consumer commented, nowadays I feel prices in Japan are going down and America is no longer cheaper. Although she was accustomed to returning from trips to the United States carrying suitcases of bargain she returned from her last two week vacation with purchases that fit in one fanny pack.
In a deflationary market, it is essential for a company to keep prices low and raise brand value to win the trust of consumers. Whether deflation or inflation an exporter has to place emphasis on controlling price escalation.
Exchange rate Fluctuations:
At one time, world trade contracts could be easily written because payment was specified in a relatively stable currency. The American dollar was the standard and all transactions could be related to the dollar. Now that all major currencies are floating freely relative to one another no one is quite sure of the future value of any currency. Increasingly companies are insisting that transactions be written in terms of the vendor company’s national currency, and forward hedging is becoming more common. If exchange rates are not carefully considered in long term contracts, companies find themselves unwittingly giving 15 to 20 per cent discounts. The added cost incurred by exchange rate fluctuations on a day to day basis must be taken into account especially where there is a significant time lapse between signing the order and delivery of the goods. Exchange rate differentials mount up. Whereas Hewlett Packard gained nearly half a million dollars additional profit through exchange rate fluctuations in one year and Nestle lost a million dollars in six months. Other companies have lost or gained even larger amounts.
Varying Currency values:
In addition to risks from exchange rate variations, other risks result from the changing values of a country’s currency relative to other currencies. Consider the situation in Germany for a purchase of US manufactured goods from mid 2001 to mid 2003. During this period the value of the US dollar relative to the euro went from strong position (US $1to € 1.18315) in mid 2001 to a weaker position in mid 2003 (US $ 1 to € 0.8499). A strong dollar produces price resistance because a larger quantity of local currency is needed to buy a US dollar. Conversely when the US dollar is weak, demand for US goods increases because fewer units of local currency are needed to buy a US dollar. The weaker US dollar compared with most of the world’s stronger currencies that existed in mid 2003 stimulated exports from the United States. Consequently when the dollar strengthened US exports will soften.
Source: International Marketing