At the time the agreement was signed the value ratio between the yen and the U.S. greenback
was 185 yen to $1.00 U.S. dollar.
For awhile the U.S. company prospered even more as the exchange rate fell from 250 yen to $1.00 U.S. It was looking like a really good bargain.
Unfortunately, the tide shifted the other way and by 1988, the yen was valued at 140 yen to
$1.00 U.S., much to the dismay of the U.S. company.
Needless to say, the U.S. company began to lose money and this jammed the company into
being caught between the proverbial ‘rock and the hard place’. The U.S. company faced the
additional burden in that they were facing such stiff competition from their competitors that
they had no latitude to increase their prices. The agreement did not include any provisions to
renegotiate the contract if faced with such a dramatic shift in the value of the rate of currency
either, which was another serious drawback.
A negotiator who conducts an international negotiation has 4 choices to make regarding
foreign currency when concluding an international joint venture. 1) They can both share the
risk. 2) The foreign partner assumes the risk. 3) Your side assumes the risk. 4) One or both
parties stipulate in the contract that the currency denomination is an area open to
renegotiation, allowing for a certain percentage of rate fluctuation to occur.
Always remember that the longer the lifespan of the agreement - the greater the risk.