Consider a Japanese firm headquartered in Japan, which reports in profits in Yen, that produces all its garments in China.

Consider a Japanese firm headquartered in Japan, which reports in profits in Yen, that produces all its garments in China. It imports 70% of its raw materials from Japan and uses labour and some other inputs in China - adding the remaining 30% of its value - to produce the garments. Assume that input quantities are used in fixed proportions.

(a) Suppose it exports all the finished garments to Japan. If the Rmb depreciates by 10%, relative to the Yen, will the reported profitability in Yen of the Japanese firm go up, down, or remain the same?

(b) Suppose it exports all finished garments to the USA, and the US$/Yen rate does not change but the Rmb depreciated by 10% against both US$ and Yen. Will the profitability of the Japanese firm go up, down, or remain the same? Explain how you arrive at your answer