The shipbuilding industry is facing a worldwide capacity surplus. Although Japan currently controls about 50% of the world market, it is facing severe competition from the South Koreans. Japanese shipyards are extraordinarily productive, but at current price levels were just about breaking even with an exchange rate of ¥240 = $1. What are the likely effects on Japanese shipbuilders of a yen appreciation to ¥180 = $1? The South Korean won has maintained its dollar value.
Answer. The statement that “Japanese shipyards are extraordinarily productive” tells you that there is not much room for cost cutting by Japanese shipyards. Hence, Japanese shipyards will be devastated by a rise in the yen, as they were. As the yen appreciates against the won, South Korean shipyards gained a substantial cost advantage vis‑a‑via the Japanese. According to a story in the Wall Street Journal, “Japanese industry officials say ship buyers now automatically bypass Japanese makers, turning instead to Hyundai Corp. and other South Korean shipbuilders, which enjoy comparative reprieve on the currency front.”
The only degree of freedom to adjust Japanese shipbuilder costs took place on the wage side. Japanese firms typically pay a substantial fraction of workers’ wages in the form of a semi‑annual bonus that is tied to corporate profits. Thus, during hard times, labor costs fall automatically. However, this decrease in labor costs was not nearly enough and many Japanese shipyards went bankrupt. A spokesman for the Japan Ship Exporters Association said that they couldn’t lower prices further. “They’re already at the bottom. We can do nothing but watch competitors take away orders.”
Japanese shipyards have responded by designing innovative ships for which demand is price inelastic. They are no longer competitive in the commodity ship business.
