Harvard Business School Case Study Tiffany & Co. - 1993

Table of contents

1. Preface

2. Economic Overview: Japan in 1993

3. FX-Exposure
3.1 Economic Exposure
3.2 Transaction Exposure
3.3 Translation Exposure

4. Organizational consequences for Tiffany & Co. on the basis of our recommendation

5. Update on Tiffany’s FX-Exposure

1. Preface

In the context of Harvard Business Case Tiffany & Co. 1993 our team will focus on the Identification, Measurement, Management of the JPY/USD exchange rate in terms of Economic, Transaction and Translation Exposures for Tiffany & Co..

2. Economic Overview: Japan in 1993

In the decade of 1960s Japan faced various trade frictions with the USA and Europe in connection with rapid expansion of industrial products exports. In 1971, the USA decided to end the convertibility of the USD into gold. Therefore the fixed exchange rate regime (namely Bretton Woods System) was not in place anymore. Japan’s reaction was to float its exchange rate from JPY 360 to JPY 308 in December 1971. In February 1973, the Japanese yen moved to the floating exchange-rate system. The Japanese Economy faced a steady growth until October 1973, as the Israeli-Arab War in this year lead to the first oil crisis, and it triggered a high inflation. As a result, Japan's economy recorded negative growth in 1974 for the first time in the post-war period. In the 1980s the trade surplus with other industrial countries continued to expand, which caused an appreciation of the JPY.

Figure 1: GDP per Capita (USD) and long-term interest rates

illustration not visible in this excerpt

Data Source: Bank of Japan, OECD.

In 1993 the extrapolated GDP per Capita in Japan amounts to USD 21,089 compared to USD 25,318 in the USA. The figures for the following years are forecasts. Both economies grew steadily, whereby the US economy grew faster. Therefore the long-term interest rates for 10Y Government Bonds in the USA were significantly higher than those in Japan, indicating a higher economic growth potential of the US economy (2003: Japan -4.32%; USA -6.44%). The long term interest rates in Japan are falling more rapidly than those in the USA.

This downward trend in Japan was caused by money inflows into the stock and real estate markets, inflating capital asset values in the form of speculative bubbles. At the beginning of 1990s, stock prices started to slip, followed by falling real estate prices.

Figure 2: Corporate Bankruptcies & Stock Index

illustration not visible in this excerpt

Data Source: OECD.

Japan’s economy had to cope with an economic stagnation and therefore higher unemployment rate. Although Japanese Current Account Surplus remained high, Tiffany & Co. expect the JPY/USD FX-rate to depreciate because of the negative outlook for the Japanese economy in the following years.

3. FX-Exposure

The FX-Exposure can be divided into three main categories: Economic (medium to long term perspective), Transaction (short term) and Translation Exposure (accounting perspective). The Economic Exposure includes both Asset and Operating Exposure which will be analysed later on.

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