Currency Adjustments

Currency adjustments help ease global imbalances, but perhaps not so much through prices, but underlying economic activity. Press reports suggest that Honda may be considering moving production for its popular FIT hatchback form Tokyo to the U.S. to offset the strength of the yen. Currently, Honda produces 8 of 10 cars it sells in the U.S, according to reports. The weak dollar combined with high productivity of American workers translates into relatively low unit labor costs in the U.S.. In addition, the risk of protectionism also encourages locating production within the U.S. itself. The build locally-sell locally foreign direct investment strategy is superior to export oriented strategies insofar as it helps insulate companies from the vagaries of the foreign exchange market., creating offsetting currency exposures and some flexibility in reallocating production when necessary. The U.S. is one of the top exporters in the world and this year will export a little more than $1 trillion. However, the foreign affiliates of U.S. multinationals will sell something on the magnitude of $4 trillion this year. The sales by U.S. affiliates has outstripped U.S. exports since the government began tracking such data in nearly 50 years ago. The Japanese Ministry of Finance estimates affiliate sales of Japanese companies surpassed exports in the late 1990s.