Unlike retailers that sell exclusively within Japan, cross-border ecommerce businesses engage in transactions that involve foreign currency. This includes overseas sales and products sourced abroad. When expanding sales channels into overseas markets, it is important to be mindful of exchange rate fluctuations, such as those resulting from a strong or weak yen.

If a business sets prices or payment methods without considering exchange rates, it might not achieve its target profit margin. However, if a business understands the impact of exchange rates and establishes appropriate pricing structures and payment and settlement systems, it can operate stable cross-border ecommerce.

In this article, we explain the basic concepts of exchange rate risk, impacts of a strong or weak yen, and measures Japanese cross-border ecommerce companies can consider to mitigate risks.

Key takeaways

• Exchange rate risk refers to foreign currency sales, purchase costs, profits, and other amounts that fluctuate due to changes in exchange rates. Typical examples include risks associated with foreign exchange transactions, currency translations, and competitiveness.
  
• Fluctuations in the yen’s exchange rate—whether it becomes stronger or weaker—can affect Japanese businesses that use cross-border ecommerce. This is the case when businesses conduct overseas sales, purchase goods from abroad, or process payments in foreign currencies.
  
• In general, a strong yen tends to benefit businesses that source goods from overseas. Meanwhile, a weak yen tends to benefit businesses that sell goods overseas.
  
• Cross-border ecommerce businesses can better prepare for exchange rate risk by using forward exchange contracts, currency swaps, and hedging products. They can also set prices that account for exchange rate fluctuations and establish environments where international customers can view prices and make payments in their local currencies.
  

What is exchange rate risk?

Exchange rate risk refers to foreign currency-denominated sales, purchase costs, profits, and other amounts fluctuating due to changes in a currency’s exchange rate. In cross-border ecommerce, businesses sell products to overseas customers or purchase products from overseas. Therefore, these transactions involve foreign currency. Fluctuations in exchange rates can directly affect the revenue of these businesses.

For example, if a Japanese business purchases $100 USD worth of goods from overseas, the purchase price is ¥10,000 if the exchange rate is ¥100 to the dollar. However, it is ¥15,000 if the exchange rate is ¥150 to the dollar. If the selling price isn’t adjusted, then the profit margin will be reduced by that amount.

In contrast, if a $100 USD product sells to an overseas customer, the sales revenue in yen is ¥10,000 yen if the exchange rate is ¥100 to the dollar. However, it is ¥15,000 yen if the exchange rate is ¥150 to the dollar.

This shows that a strong or weak yen can have a positive or negative effect, depending on whether the business sells to overseas markets or purchases from them. To ensure the stable operation of a cross-border ecommerce business, it is important to develop a business plan with the expectation that the exchange rate will fluctuate. This includes carefully reviewing selling prices, purchase prices, payment currencies, and deposit currencies.

Main types of exchange rate risk

There are three main types of exchange rate risk: foreign exchange transaction risk, currency translation risk, and foreign exchange economic risk (also known as “economic exposure”).

Foreign exchange transaction risk

Foreign exchange transaction risk refers to the risk that occurs in foreign currency-denominated transactions when the exchange rate at the time of the contract or order differs from the exchange rate at the time of actual settlement or receipt of payment.

For example, a Japanese business purchases goods from overseas with an exchange rate of ¥140 to the dollar at the time of the order. The exchange rate rises to ¥150 to the dollar by the time payment is made. Therefore, the purchase cost in yen increases.

Similarly, when selling products to overseas customers in foreign currency, the exchange rate can change between the time the order is placed and the payment is received. This can result in the final amount converted to yen differing from what was originally expected.

For cross-border ecommerce businesses, this is arguably the most common exchange rate risk. It often arises from purchasing, sales, payment processing, and receipt of funds happening at different times.

Currency translation risk

Currency translation risk is the risk that the yen-denominated value of foreign currency-denominated assets, liabilities, and revenue will fluctuate due to changes in exchange rates when these amounts are translated (i.e., converted) into Japanese yen.

For example, if sales proceeds are held in foreign currency in an overseas account—or if the financial information of overseas offices or subsidiaries are converted into Japanese yen—the amounts will fluctuate depending on the exchange rate. This means that it is important to keep track of the current valuation.

Foreign exchange economic risk

Foreign exchange economic risk—also known as “economic exposure” or “strategic risk”—refers to the risk that fluctuations in exchange rates will alter a business’s price competitiveness and earnings structure over the medium to long term.

For example, if the yen continues to weaken, the cost of goods purchased from overseas will rise. Profit margins might decline unless selling prices also rise. On the other hand, if prices are raised too much, there is a risk of losing price competitiveness with other companies.

As such, foreign exchange economic risk can affect short-term profits and losses and the overall business strategy, including adjustments to sales prices and changes in suppliers.

Impacts of a strong and weak yen

To understand exchange rate risk, it is important to grasp how a strong and weak yen affect business operations. In general, a strong yen tends to benefit businesses that source goods from overseas, while a weak yen tends to benefit businesses that sell goods overseas. However, the actual impact varies depending on the supplier, customer, settlement currency, receipt currency, and pricing.

Strong yen

A strong yen refers to the value of yen rising relative to foreign currencies. For example, when the exchange rate changes from ¥150 to the dollar to ¥120 to the dollar, a customer needs less yen to purchase the same $1 worth of goods.

When the yen is strong, businesses that source goods from overseas can more easily keep their procurement costs down. However, when selling products to overseas customers in foreign currencies, sales converted to yen can decrease, which can lead to a lower profit margin.

Weak yen

A weak yen refers to the value of the yen declining relative to foreign currencies. For example, if the exchange rate changes from ¥120 to the dollar to ¥150 to the dollar, a customer needs more yen to purchase the same $1 worth of goods.

When the yen is weak, businesses that source goods from overseas tend to see their procurement costs rise. On the other hand, when selling products to overseas customers, the sales amount increases once those sales made in foreign currencies are converted to yen. This can make it easier to generate profits.

The impact of a strong or weak yen varies depending on the nature of a business’s transactions. When sourcing goods from overseas for sale overseas or when transactions involve multiple currencies, it is difficult to make a determination based on the simple calculation described above. It is necessary to take more factors into account to make the best decision.

Expansion of Japan’s cross-border ecommerce market and exchange rate risk

For Japanese companies, cross-border ecommerce is a powerful sales channel to deliver products and services to overseas customers. By expanding sales channels to include the Japanese market and overseas markets, businesses can benefit from new sales opportunities.

According to the 2024 Ecommerce Market Survey published by the Ministry of Economy, Trade and Industry (METI), the size of the 2024 cross-border ecommerce market in Japan, the US, and China increased. In particular, cross-border ecommerce purchases by Chinese customers from Japanese businesses totalled nearly ¥2.64 trillion, reflecting a significant overseas demand for Japanese goods and services.

On the other hand, cash flow in cross-border ecommerce differs from domestic transactions. This can include payments from overseas customers, sales denominated in foreign currencies, fund transfers to overseas partners, and purchases of goods from outside of Japan. For this reason, fluctuations in exchange rates are a key factor affecting sales, purchasing costs, and profit margins.

As the cross-border ecommerce market expands, exchange rate risk is becoming a business challenge that Japanese companies can no longer afford to ignore. To maintain stable overseas sales, it is important to understand the impact of exchange rates and establish the appropriate systems for pricing, payment processing, and receiving payments.

How to manage exchange rate risk

Although it’s difficult to completely eliminate exchange rate risk, taking proactive measures makes it easier to mitigate the impact of exchange rate fluctuations.

Use forward exchange contracts, currency swaps, and hedging products

If foreign currency payments or deposits are already scheduled, businesses can use forward exchange contracts to lock in exchange rates with their financial institutions in advance. Using forward exchange contracts makes it easier to forecast upcoming payments and deposits. However, businesses are not free to set their own rates; instead, financial institutions quote reservation rates based on the exchange rate at the time and the transaction period, among other factors.

In addition, if a business makes both sales and payments in a foreign currency, managing income and expenses in the same currency can reduce the number of times the business needs to convert them to yen. This approach is known as a “currency swap”. It involves foreign currency-denominated income and expenses being balanced to mitigate exchange rate risk. The term refers to the act of pairing or matching two opposing cash flows in the same currency.

A third way of protecting against losses caused by exchange rate fluctuations is to use hedging products offered by financial institutions. However, since the systems, costs, and risks vary depending on the product, it’s important to consult with a financial institution or expert before using them. This can help ensure they’re suitable for the business’s trading volume and objectives.

Consider exchange rate fluctuations when setting prices

In cross-border ecommerce, it is important to set prices that take exchange rate fluctuations into account. If procurement costs rise due to a weak yen, businesses that source products from overseas and do not change selling prices can experience declining profit margins.

When setting a price, it’s important to check that the business will be able to maintain a profit with the current exchange rates and within a certain range of fluctuation. Another important step is establishing the timing and rules for price adjustments in advance. This is necessary in case of significant exchange rate fluctuations.

Check available currencies and payment methods

In cross-border ecommerce, the currency customers use for payments can differ from the currency businesses receive. For example, a customer pays in USD, but the payment deposits into the business’s account in Japanese yen. In these cases, it’s important to check applicable exchange rates and the costs of foreign exchange fees.

When selling products to international customers, it is important to create a multilingual ecommerce site, display prices in the currencies customers typically use, and provide payment methods that are popular in their local markets.

Keep in mind that as the number of currencies and payment methods grow, the more complex currency conversion, fees, and deposit management will become. For cross-border ecommerce, it is important to focus on creating a payment environment that makes it easy for customers to pay and for businesses to manage their sales and deposits.

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FAQs about exchange rate risk in Japan

The following are some frequently asked questions about exchange rate risk in Japan.