J-Curve

J-Curve is a diagram that follows the same pattern as the “J” letter. That corresponds to an initial loss immediately followed by a sudden gain. A J-Curve can be used in multiple contexts.

When it comes to economics, most often a J-Curve is used to describe the effects of a weaker currency on trade balances. The most common scenario is the following one:

The currency of a nation suffers devaluation which makes imports more expensive and exports cheaper, thus creating a smaller trade surplus. However, shortly after, the volume of sales for that nation begins to climb steadily, given their relatively low prices. Additionally, consumers start to buy goods produced locally, since they are cheaper than those imported. Over time, this makes the trade balance between the nation and its partners bounce back, and in most cases, it surpasses pre-devaluation values.

Nevertheless, when the currency of a country appreciates, a reverse J-Curve may happen. The exports of the country become more expensive for other nations. If other countries can fill the demand at lower prices, the export competitiveness of the stronger currency will be reduced. Local consumers may start to choose imports as well since they became cheaper than products produced locally.