What is a J curve chart?
June 21, 2021, | AtoZ Markets – A J curve chart shows a change in the movement where the first one is downward, succeeded by a gradual rise. The chart imitates the letter J, hence the name J curve. This chart represents a decline in returns and a gradual recovery compared to the starting point. We can link this period to various market areas such as political science, medical fields, economics, equity funds, etc.
The J curve in terms of private equity funds
Private equity will usually pose a decrease in returns for the first few years. Later on, returns will increase as the maturity date comes near. Why are there negative returns at first? These returns may be due to investment costs, management fees, an investment portfolio that is not yet mature, or early writing off portfolios.
In most cases, private equity funds do not take from the investor unless they have investments that generate profit. Investors supply funds when needed. Some lenders like banks may negotiate a cash flow sweeps from private equity funds. How? The private equity fund may need to pay a debt using all or some of the generated cash.
A J curve chart movement depends on the amount of the returns and how fast investors get high returns. The chart shows everything. If a curve is steep, then there is a high return in a short period. If the curve has a slow rise, then there must be low returns in an extended period.
The J Curve in terms of economics
In terms of economics, the J Curve chart pertains to a change in a nation’s balance of trade. There are initial devaluations and depreciation of the currency. What happens during this period? One important fact is a weak currency. The imports will be expensive, so it will be practical to export commodities to earn more profits. This decline in the chart causes a current account drop that is why there is a small surplus with a significant deficit.
Later on, the demand for costly imports and cheap exports will be constant temporarily because consumers will naturally look for more affordable replacements. However, if the weak currency lasts for a more extended period, consumers will probably switch to cheaper products that the locals make. Now, we can see that the desired account balance improvement is showing. We can see that there is a J curve when the country experiences a weak currency, so the exports become cheap compared to the imports.
More on the J curve
Albeit the given examples on how the j curve takes action, a j curve can be any occurrences that experience a change with a strong reaction and follows an expected direction wherein you’ll see a J shape if you plot it on a chart.
Even if it is not about business and finance, we can also use the j curve in the medical field. For example, the x-axis on a patient’s chart shows the possibility of curing one of two conditions. The y-axis shows a chance for the patient to contract another disease.
The J curve is a versatile chart that people can use in different fields.