Case Title: The Mexican Peso, the Japanese Yen, and Pokmon Go

Case Abstract

This case explores the implications of changing currency values on Japanese game maker Nintendo. Nintendo's revenues in Mexico have been affected by the falling value of peso against the yen. In early 2015, one Mexican peso was equal to 8 Japanese yen, but by September of 2016, one peso was worth just 5.1 yen. Trades of Mexican pesos to Japanese yen typically require a conversion via the U.S. dollar. In 2016, the dollar was lower against the yen, while at the same time, the Mexican peso was lower relative to the dollar making conversions of revenues earned in pesos worth much less when translated back to yen.

Currency values often reflect investors' risk assessments of a country. Japan's position as a safe haven country, for example, helps to support the value of its currency. In contrast, the Mexican peso, the most liquid emerging market currency, took a hit following the election of Donald Trump in 2016. Trump had been outspoken in his perception that the trade agreement between the United States, Mexico, and Canada, known as NAFTA, did not benefit the United States as much as it did Mexico and Canada, and that therefore, the United States should pull out of the agreement.

While NAFTA was ultimately renegotiated and renamed, the impact of the drop in the value of the peso relative to the yen created issues not only for Nintendo, but for other companies as well. Toyota and Mazda saw prices for components used in their assembly operation in Mexico rise when prices on Japanese-produced parts were translated into pesos. Higher prices resulted in lower profits for both companies. At the same time, the decline in the peso meant that some companies were better off. Mexican pork processors, for example, benefitted from the weak peso via exports to Japan. Convenience stores in Japan also profited from the lower peso, buying Mexican processed pork and capitalizing on currency movements and lower labor costs.

Discussion Questions - Explain at length

1. Why are most trades between the Japanese yen and the Mexican peso made through U.S. dollars?
2. Explain why the peso fell in value against the Japanese yen during 2016. How predictable was this fall?
3. What were the benefits of the fall in the value of the peso against the yen for Mexican companies? What were the costs?
4. Should Japanese companies, such as Nintendo and Toyota, with business in Mexico have hedged against adverse changes in the peso/yen exchange rate? How might they have done that?