Mkt 545 Chp11

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MKT 545 1. Why did the contraction of the U.S and Japanese economies and the rise in the value of the yen hurt Sony’s exports from Japan? The size of the U.S. economy and political stability, even in the face of a presidential election in November 2008, tend to make the United States an attractive place for investment. Thus the fear factor seemed to be a critical vote for the dollar during the crisis. This is a short-term phenomenon, however, and will eventually be replaced by economic fundamentals. With the slowdown in the U.S. economy, export dominated countries, especially emerging markets, were expected to suffer. Also, the credit crisis that the United States was going through was expected to expand to other countries. The euro is obviously a strong and important currency, but It lacks a strong central government that can coordinate a response to economic crisis. About the yen. Interestingly enough, the yen also became a safe-haven currency during the crisis, along with the dollar. Obviously, the yen is the most important currency in Asia, because Japan has the second-highest foreign-exchange reserves in the region and the world, just after China, but it is a freely convertible currency with high market liquidity and is also an important trading currency. Also, with Japanese interest rates so low, many investors were borrowing in yen and investing their proceeds abroad to get access to higher returns. When the crisis hit, the money quickly left the emerging markets and returned to Japan, a practice called carry trade. The strong yen was also hurting Sony's financial statements. As Sony translates U.S dollar or euro financial statements into yen, net assets and earnings will be worth less in yen, dragging down Sony's consolidated results. The only way to offset this drop is to sell more and improve profit margins, both of which are hard

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